Wool has been an important product to the Australian economy since 1797. “In 1797, John Macarthur imported a small flock of merino sheep (3 rams and 5 ewes) from the Cape of Good Hope with the intention of producing fine fleeced sheep at ‘Elizabeth Farm’, his property in Parramatta.” (State Library of New South Wales, 2012) Depicted in image one is the Australian Wool Exchange, where buyers and brokers from the community would come and shout their bids for wool along with waving their catalogues in the air. Even though, it “[took] almost a quarter of a century for Macarthur’s breeding program to produce enough wool to auction.” (State Library of New South Wales, 2012) The booming wool industry made many traders wealthy by the 1880s.
Image one: Exchange Wool Sale Rooms, Sydney, 1900?
Source: (Marks, 1900).
“In the late 1890s, lower wool prices and the infamous Federation drought devastated the industry.” (State Library of New South Wales, 2012) As sheep numbers from the drought dropped significantly, wages of the farmers also decreased significantly. In turn workers in the wool industry seeked out protection and industrial actions. “The unions formed by the shearers became the Australian Workers Union in 1894 and eventually helped give rise to the Australian Labor Party.” (State Library of New South Wales, 2012) This would soon result in the wool crisis of 1990-1991, where the Australian wool industry implemented destructive economic polices which as an unseen consequence costed Australian wool producers.
This economic policy set a reserve price on wool (price floor), below the profitable amount wool could be sold at. See my article on price floors and ceilings. Instead of allowing the prices to adjust in the free market, the government had to fix them. Interfering in any market prices is damaging but this one was especially damaging as they set it during the boom stage, demand was booming yet there were refusal from sellers to lower the price. However, as wool produces still receiving high prices and guaranteed sales, produced huge volumes of wool. Buyers finally reduced their purchases of wool changing to substitute goods. The Australian Wool Corporation (AWC) set the price and passed the price onto farmers, the demand for wool was reduced while the production continued to increase, creating a shortage. The end result of the boom was a huge stockpile of unsold wool, there was enough wool that it could stretch from Perth to Sydney.
This is when the AWC and the Australian Government agreed to purchase the wool at the artificially high price, in order to keep afloat the inflated industry, and had to borrow billions of dollars to afford it. Then it was stored in sheds that incurred extra storage and interest costs, waiting until the prices rose again. “By the end of the scheme, the amount of wool being stored reached extraordinary levels (4.8 million bales, approaching a billion kilograms), and it was incurring around $3 million per day (over $1 billion per year) in costs of storage and interest.” (Pannel, 2014)
An more efficient way to halt over-production would be to scrap the fixed price. However, in order to lower production to equal the quantity of wool purchased, the AWC instead taxed highly the price of wool to the producers. Where wool buyers are still charged high prices they only purchase low quantities. However, taxes are worse on farmers than the free market would be as taxes to be able to eliminate surplus production, wool producers would have to then receive a low price and produce less wool. Supporters of the scheme argued that a shortfall in demand could be overcome through its promotion in the market in which the wool tax was spend. (Pannell, 2014) Postponing the collapse of the scheme just inflated the costs.
Finally, when the Australian Government stopped the scheme at much opposition to the AWC. Those in the wool industry such as the wool farmers, producers, processors, traders, and Australian taxpayers all lost capital at their expense due to this one imposed scheme. Who then blamed it on politicians, economists, and wool customers when it was the AWC’s fault. “Charles Massy in his excellent book “Breaking the Sheep’s Back” estimates that the total cost was at least $12 billion in 2011 terms (and probably much more), making it “the biggest corporate disaster in Australian history in terms of losses generated by a single corporate or statutory business entity” […]” (Massy in Pannell, 2014). Charles Massy is an author of this book and he is an experienced wool grower, see him on this video here, Source: (Massy, 2012).
“We can count the billions of dollars lost, but we don’t have statistics for the depression, the suicides, the fractured families or the agony caused to farmers by having to shoot and bury thousands of worthless sheep.” (Pannell, 2014) Also, those of the AWC were unlikely to have been held account for and responsible for it’s terrible consequences then and it’s continued future impacts. If only they understood basic economics could this have been prevented form happening. “Not only did the industry leaders lack this understanding, but, as Massy reveals, they actively resisted and rejected advice from competent economists when they received it, including economists who worked for them.” (Massy in Pannell, 2014)
While the industry gained a steady recovery, the formalization of education came about to provide possible entries to the wool industry. “[Colleges] such as the Sydney Wool Institute were set up to provide a grounding in all areas of the business.” (State Library of New South Wales, 2012) Additionally, today even after the trouble this industry had been placed under Australian wool industry today is selling unique high quality wool. “[Australian] merino wool is still considered to be a high quality, luxury item, much in demand by the fashion and textile industry.” (State Library of New South Wales, 2012)
Pannell, D. (2014). 266 – supply and demand: the wool crisis. Pannell Discussions. Retrieved [10/04/2016] from <http://www.pannelldiscussions.net/2014/05/266-supply-and-demand-the-wool-crisis/>.
Presented by E. S. Marks. (1900). Exchange wool sale rooms, sydney, 1900?. State Library of New South Wales. Call No. SPG / 137. Retrieved [10/04/2016] from <http://acms.sl.nsw.gov.au/item/itemDetailPaged.aspx?itemID=866899#>.
State Library of New South Wales. (2012). Macarthurs. State Library New South Wales. Retrieved [09/04/2016] from <http://www2.sl.nsw.gov.au/archive/discover_collections/history_nation/agriculture/life/macarthurs/index.html>.
Bardley, P. (1994). The collapse of the Australian Wool Reserve Price Scheme, The Economic Journal 104(426), 1087-1105. Retrieved [10/04/2016] from IDEAS page.
Massy, C. (2011). Breaking the Sheep’s Back, University of Queensland Press. Retrieved [10/04/2016] from <https://www.penguin.com.au/products/9780702238857/breaking-sheep-s-back>.
Richardson, B. (2002). The politics and economics of wool marketing, 1950–2000, Australian Journal of Agricultural and Resource Economics 45(1), 95-115. Retrieved [10/04/2016] from <http://onlinelibrary.wiley.com/doi/10.1111/1467-8489.00135/abstract>.
Featured image supplied from Unsplash (edited).
Copyright © 2016 Zoë-Marie Beesley
Licensed under a Creative Commons Attribution 4.0 International License.