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Breaking the Sheep’s Back: A review of the Australian wool industry and government intervention

By Mark S. Lawson - posted Monday, 22 August 2011


The Global Financial Crisis and the world’s ongoing economic woes has given new life to various commentators who believe that the markets, in general, are really a big mistake and should be replaced with something gentler, more caring and sharing.

Exactly what should replace markets and the existing international economic system is never specified. But of more concern is that these commentators, who regularly feature in Online Opinion are either unaware of, or choose to overlook, the fact that Australia has already tried shielding itself from the harsh rigours of competitive markets. Shielding only ever achieved long periods of industry stagnation, punctuated by the occasional disaster.

The most notable of these disasters, the spectacular collapse of the Australian wool reserve price scheme, is the subject of Charles Massy’s book Breaking the Sheep’s Back (2011). It is an almost forgotten piece of our economic history, but well worth revisiting as a counter to those commentators who occasionally urge us to abandon markets.

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The wool reserve scheme was set up as a mean of smoothing out the occasional swings in prices for the commodity, of which Australia is a major producer. The Australian Wool Corporation (AWC) would buy wool if it fell below a set price, determined by the Wool Council of Australia, and sell it later when the market recovered.

The scheme was a cornerstone of the old system of comprehensive state and federal government interference in agriculture, with all sorts of milk boards, egg marketing boards and the like. That system was complemented by a system of tariffs, behind which Australian industry ossified, and on top of that was a network of industry cartels – secret price fixing agreements between different companies in the same market.

Massy, a wool industry veteran whose long career includes founding a merino stud farm, says that the reserve price scheme was a cherished dream of leading agripoliticians for many years before they managed to get it set up towards the end of long Liberal-National reign in the early 1970s. Also endorsed by the incoming Whitlam government, the scheme was supported by a levy on wool sold by growers.

Those agripoliticians, including the formidable Country (now National) Party leader Sir John ‘Black Jack’ McEwen and the redoubtable Sir William Gunn (a Goondiwindi grazier turned shrewd operator) and everyone else involved were warned repeatedly, and with some accuracy, about what would eventually happen.

Other commodity schemes had been set up elsewhere only to eventually collapse. But those warnings were barely noticed and for a time all went well. The Wool Corporation built up immense reserves, and in the late 1980s the wool market boomed. At its peak in April 1998 a kilogram of clean wool (as distinct from the greasy varieties which has impurities) was worth 1269 cents: the high price encouraging a vast increase in production.

At one point, the power to set the reserve price for wool slipped out of the hands of government into that of the Wool Council. Carried away by its own publicity, the Wool Council set the floor price at a far too high 830 cents a kilogram. Shortly after that decision the market not only turned, but the bottom almost fell out of it.

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For various reasons both the Chinese and the Russian mills all but stopped buying. Before long, the AWC had run through its billion dollar plus reserves and started borrowing. Warehouses all over Australia were bursting with a massive and unsalable wool stockpile. But the Corporation and Council resolutely refused to consider any reduction in the floor price. This crisis staggered on for some time without the Hawke-Keating Labor government of the time paying much attention. It was preoccupied with the aftermath of the 1987 crash, and a looming meltdown of the Australian financial system.

As Massy notes matters were not helped by the relevant minister of the time, John Kerin, adopting the approach of trying to work with the industry to make them see the error of their ways, as well as take the blame. It was a caring, consultative approach when, as Massy says, Kerin could have greatly reduced the resulting misery by kicking heads – telling the wool industry “its over” and ditching the whole scheme.

Instead Kerin greatly increased the stockpile and debt over many months while he tried to get the wool industry’s leaders, who were not really representative, to see reason. When he did act, he blundered by initially cutting the reserve price to just 700 cents a kilogram and guaranteeing it. There were still no buyers. In early 1991, with the wool corporation piling up millions of dollars in debt every day, Kerin finally declared the scheme over. When free market auctions resumed shortly afterwards, wool sold for 430 cents a kilogram. It took about a decade to sell off the stockpile.

Massy’s book is not history as the term is generally understood. The last chapters are opinion and, although the author has obviously worked hard to get the fact rights, he still leaves out important details. For example, readers are told that there were referendums on the reserve price scheme in the 1960s, but Massy neglects to say who arranged the referendums and doesn’t clarify if woolgrowers voted, what the deal was concerning the vote, and what the results were.

All that said the book remains a good read and immensely informative about many of the details that remained murky at the time. It also remains an excellent object lesson for those who want to return to the bad old days of high tariffs and what use to be called agrarian socialism. The wool reserve price scheme was an effort to be caring and protect a deserving set of individuals, namely woolgrowers, from the rigours of the market. Instead it ended up badly hurting the very group it was trying to protect.

Massy points out that the reserve price scheme and industry structure hurt the industry in many ways. Wool buyers did not like being gouged by what amounted to a cartel and, crucially, there was no incentive for suppliers to innovate. In particular, only token efforts were made to counter growing market competition from cotton and synthetic fibres, by developing improved wool products. Woolgrowers kept shearing sheep and sending the material off, more or less as they had always done.

This was bad policy, underpinned by bad ideology. Those who defy the markets will eventually lose. They may lose slowly, or lose in a spectacular collapse, but they will lose. The wool industry has yet to recover.

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About the Author

Mark Lawson is a senior journalist at the Australian Financial Review. He has written The Zen of Being Grumpy (Connor Court).

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