An overview of the article
An article, Finally superfine wool pays by Sarina Locke highlights the rising fortunes of superfine wool producers because of good feed and great prices (Locke 2011). The indicators of the market have been good since 1988-89. These indicators are mainly for wool that makes “luxurious fine suits and dresses” (Locke 2011).
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However, previous years have been difficult for wool producers. For instance, a producer sold good ewes for $10 the previous five years ago as opposed to the current rate of $90. Poor seasons and severe “droughts had affected wool production” (Locke 2011).
Wool clip quality has become finer. Woollen mills in China and Italy have improved their technologies and therefore, superfine woolgrowers must improve their wool production techniques. Previously, one could not understand the fundamentals of the wool market. Over the years, however, the massive “production of finer wool with 18 to 19 micron has increased steadily” (Locke 2011). The demand has increased while wool mill focuses on quality fibres. Consequently, price has improved too.
Wool producers have noted that both “consumers and producers have been attracted back to high quality of wool products and higher returns” (Locke 2011). In addition, Australia’s commodity forecaster ABARES has shown that” wool prices will remain relatively higher for the next five years because high lamb prices would affect the supply of wool” (Locke 2011). The current prices are good for aspiring “superfine wool producers” (Locke 2011). Overall, the wool market looks promising and sustainable.
The market structure that ASWG operates
ASWG operates in a monopolistic competition. This market structure consists of different competitors who sell slightly various superfine wool products (Perloff 2008). It is possible that wool producers make independent decisions about pricing of their wool products by considering market forces such as cost of production and markets.
Although wool producers may have widespread knowledge about the market, it is never perfect. For instance, buyers may review the wool quality before making any purchase decisions (Cline & Thomas 2005).
It is relatively simple to enter the market and leave it because there are no significant entry or exit barriers (Gans et al. 2003). For instance, it is noted that a new generation of young people have expressed their interests in the wool industry because of high returns.
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The major characteristic of this monopolistic competition market structure is the different quality of wool. For example, the micron ranges from 17.5 to 19 micron.
This is physical product differentiation as depicted by the micron of the wool. Moreover, producers aim to ensure that the superfine wool meets the A1 quality during shearing. They must “test sheep micron before shearing and discard any wool” (Locke 2011) that does not meet the required standard.
Superfine wool producers aim to maximise profits because they are small, many, independent entrepreneurs who compete in the market.
In the end, monopolistic competition attracts new entrants. This is evident in the case study. Many young people have expressed their interests to join woolgrowers because of the profits. Normally, the new entrants will run the business until the price and profits revert to normalcy. This would mark the long run equilibrium in the monopolistic competition. Evidently, woolgrowers will benefit most within the next five years when the products are good.
The evolution of the industry’s output and individual firm’s profits since 1988-89
Woolgrowers have not seen the indicator as good since 1988-98 (Locke 2011). For instance, in the last five years, woolgrowers “sold their good ewes for just $10” (Locke 2011). The article points out that for “the last ten years, wool has cost producers dearly” (Locke 2011). The quality of wool was not superfine while the volume had declined for the last ten years. For the last ten years, the prices have been below the cost of production.
However, the market has changed considerably because of high quality feed and great prices.
For instance, ewes that were sold for $10 in the previous year now fetched $90/head. This is an increment of 900 percent in less than a year. The price of wethers also increased to $108.
The woolgrowers produced “800 million kilograms of wool in the year 2000, but the output was expected to be less than half of that in the subsequent year” (Locke 2011).
The prices for superfine wool have been rising. Clearly, they have been improvements relative to the past decade, which performed poorly below the cost of production (Locke 2011). As the quality of micron improves, so are the prices, which now range from “1100 to 2200 c/kg depending on the micron” (Locke 2011).
The fortunes of woolgrowers have increased too. A single woolgrower with “8000 sheep for shearing at the price of $60 for 1200c/kg” (Locke 2011) will fetch nearly half a million dollars in earnings. It is unbelievable. In addition, they continue to fetch good rates from lamb meat, which apparently drives costs of superfine wool higher.
A prediction of the industry’s output and individual firm’s profit, in the long run
The market pundits have predicted a sustainable market, increased production of superfine wool and higher prices for wool. The industry fundamentals remain extremely strong and therefore the bubble may not burst, at least for the next five years.
There are strong demands in all parts of Asia and Europe, as well as a new demand in Egypt, while production has remained relatively low (Locke 2011).
Although the bubble could burst, the market major players are “quite confident and optimistic that the current levels are realistic” (Locke 2011). Moreover, both consumers and producers have expressed desires to return to wool. Still, the wool prices are driven by strong demands from lamb prices.
The harsh weather patterns could affect future production volumes, but increase the quality of the wool, which in turn would lead to higher prices.
Note: the prices are extrapolated to reflect possible changes in prices of superfine wool in the next few years.
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The prices of superfine wool has increased because of high quality feed and improved prices for producers (Locke 2011). ASWG operates in a monopolistic competition and therefore, it will continue to define prices of superfine wool based on the quality as determined by micron.
The market shows steady demands, higher prices and possibility of new entrants. The prices and production of superfine wool have continued to improve. The current production cannot meet higher demands all over Asia, Europe and Egypt. The industry forecast shows strong growth because of reasonable levels with a limited possibility of a bubble burst. These figures are expected to remain strong for the next five years. There are higher chances of new entrants in the market because of strong performances noted in the recent past.
These strong market fundamentals are likely to sustain the superfine wool market and drive higher demands and prices while producers will not be able to meet demands.
Cline, A, & Thomas, D 2005, ‘A Consumer Behavior Approach to Modeling Monopolistic Competition’, Journal of Economic Psychology, vol. 26, no. 6 , pp. 797–826. doi:10.1016/j.joep.2005.05.003.
Gans, J, King, S, Stonecash, R & Mankiw, G 2003, Principles of Economics, Thomson Learning, New York.
Locke, S 2011, Finally superfine wool pays.
Perloff, J 2008, Microeconomics Theory & Applications with Calculus, Pearson, Boston.