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Thursday, 31 May 1979


Senator WALSH (Western Australia) -The purpose of the six Bills before the House essentially is to continue the 5 per cent levy on gross wool sales for the Market Support Fund and to establish the trust fund and collection arrangements that are necessary for that Market Support Fund which is expected to stand at something over $200m by the end of this season. It continues the floor price arrangements initiated in 1974 when Senator Wriedt was Minister for Agriculture at a time when the wool market was seriously depressed. Indeed, it was so seriously depressed that it was necessary for. the government of the day to appropriate some $350m for the maintenance of the reserve price which had been set in the 1974-75 season at 250c per kilogram for 2 1 micron clean wool. In the depressed period the stockpile peaked just under 2 million bales. The wool market at the moment is much more favourable. The stockpile has fallen to a figure in the vicinity of 400,000. It changes on a daily basis, so one cannot be precise about it. But it is in the region of 400,000. The present market price for most grades, and for the indicator, is some 20 per cent above the present floor price. This situation, however, should be seen in perspective.

I want to say something about what I see as being undue and unwarranted, if not irresponsible, optimism by some people as to the true nature of the wool market and the immediate prospects. This optimism, I think, can be partly attributed to the Government and its desire to promote the idea that there is a rural-led economic recovery in the pipeline. Whilst it is certainly correct that the very large increase in farm incomes this year will be a major, if not the major, component of such economic growth that does take place in this financial year, this increase in incomes has been caused almost entirely by three factors. The first is the very large wheat crop. That is not likely to recur next year or perhaps for another decade. The second is the big increase in beef prices over the last 12 months, which probably will be sustained for three or four years. The third, a causative factor which is not often mentioned, is the continuing devaluation of the Australian dollar, which has increased, in terms of Australian dollars, the price received for agricultural exports. This is particularly relevant to the wool market.

A recently published graph and supporting figures in terms of user nation currency and the currency of our wool customers shows that the price of wool over the last 12 to 18 months has not increased but has fallen marginally, so that the present relatively high price of wool in terms of the Australian dollar is a function of the continuing devaluation of the Australian dollar rather than the true state of the wool market and the demand for wool. I noted that the sort of caution which I am now urging was also urged by Mr Richardson of the Australian Wool Corporation in a letter to the editor published in the Australian on 29 May 1979.

One could say, justifiably, that there is little evidence that the Government really believes its own propaganda. If the Government really believed that the wool market and the prospects for the future were as sound as the euphoric statements of some of its spokesmen from time to time would suggest, it would be less coy about giving some assurance that the reserve price will be substantially increased in the coming season. Far from giving any assurance that a substantial increase in the reserve price is likely, which would be the logical thing for a government which believed its own propaganda to do, the Minister for Primary Industry (Mr Sinclair) has been pointing out, to the woolgrower groups in a calculated way, I believe, that it is not really necessary to increase the firm floor price because the pot holding operation, the variable daytoday market indicator, can be moved up independently of the floor price, which of course is true. But if the Government really believed that the market was going to be as buoyant in the next 12 months as it sometimes suggests, it would not flinch from a substantial increase in the floor price, and the indications are that it has no intention of doing that.

While on that point, I would like to make my own view quite clear. There is a widespread belief among wool growers that the floor price for wool ought to be tied to some cost index. One such index is what is called the cost of producing wool. I do not know how that could be determined; in fact I am not sure that I know what it is. On the other hand, a floor price having been established, that price could be automatically indexed to the consumer price index. That idea has a good deal of popular appeal, because it seems to be just. But it is not a sensible basis on which to determine the level of the floor price. The level of the floor price, by any rational assessment of the matter, has to be tied to what is expected to be the long term demand for wool, and not to any movement in so-called production costs or any other index of prices.

The popularity of the idea, of course, guarantees that it receives tacit support, and in some instances overt support, from a number of politicians representing rural electorates who can see some electoral advantage for themselves in going along with what is popular instead of what is true. As I have said before, the actions of such people are not in the long term interests of agriculture, and these people are not friends of the farmers. They put their own short term political welfare before the long term welfare of the people for whom they purport to speak.

There has been considerable debate over the last few months about the benefits or otherwise of the floor price scheme, which has operated for almost five years. In particular, a study whose results were released by the Bureau of Agricultural Economics at the AGRO '79 conference in Perth in March, whilst concluding quite unequivocally- and I do not think there will be any dispute about this-that the operation of the floor price has stabilised wool prices, cast serious doubts upon its effect on the total income of the wool industry over the whole five-year period. The study suggested that because of the operation of the floor price, the total industry income is some $46m less than it would otherwise have been. It is highly technical work. I freely confess that it is too technical econometrically for me to understand, but people who do understand these matters tell me that the methodology employed by the BAE in coming to that conclusion was at least open to question.

The critical factor, and one that cannot ever be fixed with precision in determining whether the operations of a buffer stock scheme, such as the floor price is, either increase long term industry revenue or decrease long term industry revenue, is the elasticity of demand, both in times of boom and in times of slump. I had previously believed that the elasticities in the wool market were favourable for profitable operation of buffer schemes. Of course that assumption is the very one upon which the BAE study has cast doubts. In fact, the BAE has argued that the elasticities are opposite to those which would favour profitable operation of such a scheme. So there is considerable doubt, and I think there always will be because of the very nature of the problem, in assessing the final consequences for industry income of a scheme of this nature.

It is argued, independently of the critical price elasticity of demand, both in boom and slump, that the price stability to wool users, which the operation of a buffer stock scheme provides, in fact increases the total demand for wool above that which would otherwise exist. It increases the whole demand for wool. It lifts the whole demand curve for wool higher than it would be in the absence of such a price stabilisation operation. Again 1 have at least one reservation about uncritical acceptance of that proposition, because if price stability were as important to users and potential users as that argument assumes, one might ask why the users do not take advantage of futures trading, which 'can give the individual producer effective insurance, at any time for a period of 18 months into the future, against wild fluctuations in prices.

The belief that price stability permanently lifts the demand curve for wool is one of the major reasons cited for acquisition or for total control of the clip by a single marketing authority. Another reason cited for what is somewhat loosely called acquisition but which in contemporary terms could be described more accurately as the wool marketing proposals put forward by the Australian Wool Marketing Corporation in 1973, or the slight variation of them put forward more recently, is that the sort of single seller authority proposed could affect very significant economies in the handling and processing of wool. It is argued that there is scope for such economies and that they could be achieved more effectively if a centralised marketing authority were established. In support of the Wool Corporation's proposition and of other acquisition schemes, it is argued also that the operations of private wool buyers, who are currently buying close to 20 per cent of the total clip, undermine the effectiveness ofthe Corporation's reserve price, which applies only with the option system.

To a limited extent that hypothesis has been tested by the Bureau of Agricultural Economics in a study of prices received in New South Wales. The Bureau was unable to confirm that on average people who sold wool privately on the farm were receiving less than market prices for those sales. There were considerable variations around that average for individual clips, as there probably would be at auction sales, but there was no evidence that overall less than market value was being received for those private sales on the farms. In support of the private selling of wool I think it can reasonably be argued that, insofar as progress has been made and more efficiency has been effected in terms of cost, methods of handling and processing wool through the auction system and the wool selling brokers associated with it, the impetus for that increased efficiency probably has come from the very real competition provided in the past by the private buyers. So it seems to me that the case on this issue is not really proven one way or the other.

I repeat a statement I have made before on this matter. At this stage it is only a personal view. If it could be demonstrated that the majority of Australian wool growers want such a marketing proposal, given the fact that the overwhelming majority- well over 90 per cent of the clip either in raw form or in semi-processed form- is exported from Australia and therefore the local market is relatively insignificant, it is my belief that a government ought to provide the legislative framework within which such a marketing scheme can be established. Coming back to deal directly with the purpose of this Bill, I feel that after the amount held by the market support fund reaches an amount of, say, $300m- the figure is arbitrary, it might be $350m- it ought to rotate; that is, the growers who contributed in the first year of the fund, 1974-75, ought to receive their contributions back. Of course, there would be some difficulties in that. Some of the people concerned would have died in the meantime. But revolving funds are operated for other purposes associated with agriculture, so there is no administrative reason for it not being done in that area.

The question which that prompts is this: If there is not a revolving fund, what will happen to the money? If the fund does not revolve in that way it will continue to accumulate indefinitely. At the end of 25 year, probably even at the end of 20 years, a billion dollars would be sitting in the fund. At the end of 40 years two billion dollars would be sitting in the fund. I think it is essential that the fund revolve in that way. The legislation currently before the Senate does not provide for the additional three per cent levy on wool sales to finance the research and promotional activities of the Australian Wool Corporation and the International Wool Secretariat. I noted with some satisfaction a couple of months ago that the Minister for Primary Industry had authorised an inquiry by the Bureau of Agricultural Economics into the effectiveness of the IWS's promotion program. Again, that is something which is very difficult to assess with any precision. Equally difficult to assess with any precision is the value or otherwise of a buffer stock scheme. But the record of some of the people associated with the International Wool Secretariat certainly leads one to doubt their competence.

I take honourable senators back to 1963 when Sir William Gunn made efforts to sell to the wool industry the IWS's then greatly expanded promotional program. The evidence which he used in selling that to the wool growers, successful though his campaign was, was quite specious. He displayed graphs showing that wool's percentage share of the textile market had fallen from, I think, 28 per cent in the early 1950s to 14 per cent in 1963. The gullible wool growers who were shown that graph were supposed to believe that unless something was done about the situation wool would disappear through the base line of the graph into a black hole in history. All that that proved was that wool production was increasing at a slower rate than total textile consumption. It was a totally specious argument, albeit a successful one. It does the wool industry establishment no credit whatsoever that it promoted such a specious argument, which it has never repudiated. Incidentally, since that time, wool 's percentage share of the total textile market has declined to 7 per cent. There is no reason to be concerned about that.

Associated with that sort of specious argument was the proposition, again originating from the International Wool Secretariat, that increased supplies of wool would push wool prices up. That, of course, was pure economic quackery. Again, it does the wool industry establishment no credit that it not only failed to repudiate that nonsense at the time it was first propounded but also has not repudiated it even now. Indeed, that fallacy is still the basis of the present Government's merino ram export policy. As recently as only last month, the Minister for Primary Industry, when he was holding discussions with the Australian Council of Trade Unions on the matter, was reported as having said that unless Australian merinos were made available to wool producers and potential wool producers in other countries, wool was in danger of becoming a minor fibre, which would have horrendous implications for the wool industry and so on. That is pure nonsense. There is no economic danger in wool becoming a minor fibre. All that matters is the price that is received for it.

Mr Sinclairwas still mouthing a variation, a modification, of the increased supply equals higher price fallacy, lt is very disappointing to find that he still docs that. It is even more disappointing to find that the agricultural Press, which ought to be a bit more alert in these matters, still either does not realise that that Minister is mouthing nonsense or does not feel inclined to expose what he is mouthing as nonsense. Last year Senator Young mouthed the same sort of nonsense. We probably will hear some of it as this debate continues. In conclusion, for those various reasons, I welcome the study on the IWS promotion program by the Bureau of Agricultural Economics authorised by the Minister.







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