Marketing and Institutional Arrangements in the Australian Wheat and Sugar Industries

In document Linkages from the farm sector to the Australian macroeconomy : towards a theoretical and empirical analysis (Page 40-45)

It is beyond the scope of the present chapter to review, in detail, the structure of the main Australian agricultural

industries, and the marketing and institutional arrangements which exist in those industries. Further, for most of the main

industries, there is a substantial existing literature which, as well as providing this background information, also provides some analysis of the microeconomic effects of the various marketing and

institutional arrangements, such as their effects on economic

efficiency and welfare. Little would be gained by replicating such material here. For our purposes, it is sufficient to note the main features of these marketing and institutional arrangements, so that they can be compared and contrasted with the corresponding elements in the simple, hypothetical market structure outlined in Section II.

A statutory marketing authority for wheat, the Australian Wheat Board (A.W.B.), was established in 1948. Since that time, all wheat produced in Australia has, with only very limited

exceptions, been acquired by the A.W.B., and it has held a monopoly over local and overseas sales. The price of wheat sold on the domestic market, particularly wheat for human consumption, has been regulated under the operation of a home consumption price scheme. Up until the late 1970s, the level of, and movements in, the home consumption price have borne little resemblence to the level of, and movements in, the export price. Rather, the home consumption price was based more on the assessed cost of producing wheat in Australia, and was adjusted from time to time in line with

for setting the home consumption price has been modified to allow some, but still very limited, role for the export price to

influence the local price. Wheat producers have received a price which has been equalised across the returns from local and export sales. Further, while local and export sales of wheat proceed over the course of a marketing year, or longer, wheat producers have typically received a first advance payment from the A.W.B., equal to a varying, but substantial, proportion of the total return from the crop, immediately on delivery of the wheat to the A.W.B. This has imposed a substantial borrowing requirement on the A.W.B., and, up until the late 1970s, this borrowing requirement was financed by domestic credit creation by the Reserve Bank. For more detail on

these various arrangements, including the gradual changes which have emerged over the period since 1948, see, for example,

Longworth (1966, 1967), Longworth and Knopke (1982), I.A.C. (1978), O'Mara (1979).

The A.W.B. also serves as the major holder of Australian wheat stocks. While the level of carryover stocks by the A.W.B., from one marketing year to the next, has often been relatively stable for a number of years, there have also been periods when annual variations in the carryover stocks have been substantial - see, for example, Alaouze et al (1978), (Table 1, pl76). It seems probable that such variations have been at least partly due to the

logistical problems caused by above average crop sizes. However, Alaouze et al also suggest that the sharp build up in wheat stocks during the late 1960s may have been a reflection of the fact that the A.W.B. possessed some degree of price searching ability in the world wheat market in that period, and was reluctant to impose

additional downward pressure on wheat prices in order to increase export sales. In general then, while changes in the volume of wheat exports have undoubtedly absorbed a significant proportion of

the variations in wheat production, active and passive stockholding by the A.W.B. has also been of some consequence, at least in some periods.

From this brief sketch it is clear that, from a microeconomic

viewpoint, the marketing and institutional arrangements in the Australian wheat industry have differed substantially to the

simple, hypothetical market structure outlined in Section II. However, from the viewpoint of the broader issues which are of concern at a macroeconomic level, there are some significant points

of similarity between the two:

(i) since the establishment of the A.W.B. in 1948 (and, indeed, for many years prior to that), export sales, largely at given world prices, are likely to have absorbed a substantial proportion of the annual variations in wheat production;

(ii) changes in the volume of wheat production have had little bearing on the volume or value of wheat sales on the local market; and

(iii) changes in world wheat prices, or in the real exchange

rate, have had a substantial impact on the real prices received by local wheat producers, and hence on real farm incomes.

The main points of departure between the two market structures, from a macroeconomic viewpoint^ are that:

(i) in some periods, annual changes in the volume of wheat

production have been at least partly absorbed by A.W.B. stocks in the short run. This is an issue not directly recognised or captured in the simple hypothetical market structure;

(ii) at least up until recently, changes in the export price

of wheat, or in the real exchange rate, have had little, if any, bearing on the price of wheat paid by local consumers; and

(iii) an advance payment scheme has traditionally operated in the industry, funded, up until recently, by domestic credit creation. This clearly represents a direct linkage from the farm sector to an important macro- economic variable - the domestic credit component of the high powered money stock - which is not explicitly

recognised in the simple hypothetical market structure. From a macroeconomic viewpoint, the Australian sugar industry shares a number of features in common with the wheat industry. It is a highly export oriented industry, with well in excess of 50 per cent of production being exported in most years in recent decades - see, for example, B.A.E. (1980). Like the wheat industry, the sugar industry has a relatively long tradition of centralised

marketing, on both the domestic and export markets - although in the case of sugar, largely under the control of a public company, C.S.R., rather than a statutory marketing authority."' Also like

3 Controls on the volume of cane production have been imposed by sugar mills in some periods. The wheat industry also

experienced a brief period of quota controls on production during the late 1960s.

wheat, the price of sugar sold on the domestic market has been legislatively determined and based, in part, on the assessed cost of sugar production in Australia - see, for example, Lawrence, Borrel and Tsolakis (1983), l.A.C. (1979).

On that basis, it is reasonable to conclude that:

(i) as is the case in the wheat industry, and as implied by

the simple model in Section II, a major proportion of the shocks to the volume of sugar production have been absorbed via an appropriate change in the volume of

sugar exports. The value of production, the value and

volume of exports, and the level of real farm income would almost certainly move in the same direction as the volume of production, with little change in the value and volume of local sales;

(ii) changes in the local equivalent of the overseas price of

sugar would result in some movement in the value and volume of sugar production, the value and volume of sugar exports and real incomes of sugar producers, all

in the same direction as the price change. Because of

the home consumption price arrangements, the impact of an overseas price change on these variables would, of course, be less precise than implied by the simple

model. Also like the wheat case, but unlike the simple

model, changes in overseas prices would have little bearing on the volume and value of domestic sales; (iii) like the wheat case, but unlike the simple model, some

proportion of the shocks to the volume of sugar

production may be absorbed, in the short run, by changes in the volume of stocks held by C.S.R.;

(iv) unlike the wheat industry, the linkage between the volume and value of sugar production on the one hand, and the domestic credit component of the money supply on the other, has not been an issue in the sugar industry.

In document Linkages from the farm sector to the Australian macroeconomy : towards a theoretical and empirical analysis (Page 40-45)