New Zealand's population of 3 million people and 70 million sheep may spur souvenir sales in airport shops, but the country's status as a major wool producer is not sparking sales on the important world market.
The wool industry is in a tailspin. "The market outlook is fairly
uncertain at the moment," said John MacGibbon, a New Zealand Wool Board spokesman, in something of an understatement.Overall, world production has exceeded demand. Underlying factors include the rise of synthetic fabrics, the large drop in Soviet buying, reduced demand by China, increased production in Australia and high worldwide stocks.
Australia and New Zealand both have traditionally operated on a price- support system. The producer boards charge a levy on member sales that is used to support prices, buy excess stock and promote the industry.
But this mechanism to protect wool producers failed early this year when worldwide supply and demand factors simply overran the industry's efforts to even out price swings.
Starting in the second half of 1990 and extending into early 1991, the
uncertain outlook afforded by the Persian Gulf war, combined with the structural demand issues, began exerting downward pressure on prices.
From a high of $8.67 a kilogram in August 1990, the auction price for clean wool dropped to $6.83 by January 1991 and $6 by February.
As the gap between market price and supported price expanded, the Australian Wool Board in early February announced it could no longer support the price. The New Zealand board followed suit.
"Wool will not be sold in a totally free market," said Pat Morrison, chairman of the wool board, in a message to members. "At the end of the day, what you get for your wool will be what exporters can sell it for."
This led to market shock as members, long used to supported prices, felt the cold winds of the marketplace. Within a few months, however, the market started to pick up again and by mid-May the price was back up to $7.99.
But last month the market began heading south again, leading to long-term questions about the future role of the wool board and the viability of price support systems in general. Between mid-May and early June, the price dropped to $7.82 then to $7.77 before another dramatic tumble to $6.35 in mid-June.
Industry officials have warned that unless prices improve, more than half New Zealand's sheep farmers will run at a loss next year.
The New Zealand board has announced it will not support prices in fiscal 1992 and will re-evaluate its stance on support in the next year. This is sheer economics. The board's price support fund declined to $131.5 million
from $276.8 million within a matter of months. The board was buying 11 percent of the wool at auctions before Iraq's invasion of Kuwait, a figure that rose to 42 percent soon after the invasion and as high as 60 percent in late January 1991 after the war started.
Farmers are now exploring other mechanisms, with some renewed interest in
financial hedging instruments like futures and options.
In addition to war jitters and weaker economies around the world, some of the other structural factors depressing prices include overproduction, high stocks and lower sales. In the five-year period leading up to 1988-89, for example, Australia increased its annual production by 55 percent as demand slipped.
Australia alone has 80 percent of a season's production stored. Meanwhile, lower sales kicked in. New Zealand sold almost no wool this year to the Soviet Union, traditionally the country's largest customer.