Wool and Mohair Price Support Programs for Wool and Mohair

John V. Lawler and Robert Skinner (202) 786-1840

ooland mohair have beendeclin­ Table 1. Only One-Third of Sheep Producers' Total Receipts Comes From Wool Wing industries in the United States ---�- for40 and 25 years, respectively. Sheep Item 1982 1983 1984 1985 1986 1987 inventories are one-fifth of their mid- -- .. �------1940' s level, and Angora goat numbers Dollars per female sheep have declined by nearly two-thirds since Producer receipts 47.20 46.89 58.24 66.16 67.12 73.05 themid-1960's. The drop occurredas Meat 33.14 30.86 38.15 46.12 45.59 53.16 the U.S. textile industryreplaced wool Wool 6.28 6.72 8.81 6.84 7.35 7.62 and mohairwith manmade fibers. Wool support payments' 7.78 9.31 11.28 13.20 14.18 12.27 Reduced consumption of lamb and mut­ ton also contributed as fewersheep were Producer expenses 48.39 43.03 40.90 39.27 43.27 44.66 Variable2 28.53 29.25 29.47 29.40 28.43 28.59 available to produce wool. Per capita Fixed3 19.86 13.78 11.43 9.87 14.84 16.07 consumption of lamb and mutton dropped fromover 7 pounds in the Receipts less cash 1940's to 1.4 poundsin 1988. Similarly, expenses -1.19 3.86 17.34 26.89 23.85 28.39 wool'sshare of domestic fiberuse fell Percent from10 percentin 1950 to 2percent in Wool payments as a percent 1988. of wool receipts 55 58 56 66 66 62 Despite significantly lower stock num­ Wool receipts as a percent bers-II million head in 1988, compared of total receipts 30 34 34 30 32 27 with 56 million in 1942-sheep are raised 1 Includes price supportpayments for unshorn lambs. 'Includes labor, feed, and miscellaneous expenses. in all States, with about 70 percent of the 'Includes taxes, insurance, and interest. total in the Rocky Mountains, Texas, and California. Wool from these areasis called "territory" wool and makes up the production. The decline in lamb and duction and demand can cause finer grades, meaning the fibershave muttonconsumption by Americans has substantial swings in U.S. wool prices. smaller diameters. The finer gradesare had a greater effect. Consumption of The two major end-uses of woolpur­ used in making high-quality, high-value Iamband mutton in the late 1980's, as a chased by domestic mills areapparel and clothing. Wool fromsheep in the Mid­ percentage of total meat consumption, carpet. Apparel woolincludes the fine­ west and Eastern States is called "fleece" was one-fourththe relative consumption and medium-grade fibersthat are primar­ wool,and most of it consists of the of lamb meat during the first fewyears ily used to make apparel yams and fab­ medium grades. Fleecewool goesinto following World War II. rics. Two wool textile processes,the sweaters, coats, and blankets. The Priceand performance competition woolenand worsted systems, each coarser, thicker diameter grades used in betweenwool and manmade fibers,over­ account forhalf of the apparel wool carpetingare not produced in this coun­ all economic activity, and raw woolprice used. The worsted system uses thefiner try and must beimported. variability areall importantfactors influ­ woolgrades to produce fabricfor expen­ Most of the revenue from raising encing the demand forwool. Wide­ sive suits and other high-value items. sheep comes from thesale of meat. Only spread consumer acceptance of The woolen system uses the medium about one-third of the cashreceipts manmade textiles-suchas nylon, poly­ grades to produce sweaters, tweed suits, (including price supportpayments) result ester, and acrylic-forapparel and floor winter coats, and blankets. Carpet wools fromthe sale of wool (table 1 ). Hence, covering has limited the demand for are the coarser, imported fibersused in changes in raw wool prices have a rela­ wool. The relativeprice stability and uni­ carpets andrugs. About 8 to 10 percent tively minor effecton a producer's deci­ formq uality of these manmadefibers of the woolused by U.S. mills is made sion to change flocksize or wool make them attractiveto textilemills. into floorcoverings. Also, since two-thirds of the woolused Unlike wool,which is a secondary by U.S. mills is imported, currency fluc­ product of sheepand lamb production, Theauthors are agricultural econcrnists with the Crops tuationsand changes in foreignwool pro- Angoragoats are raised specifically for Branch, Ccmmodity Econcmics Division.

50 National Food Review Wool and Mohair

their fleece. Mohair, the shornhair of exportalmost all of their production. Price Support Programs the Angora goat, is a specialtyfiber with The major buyers are Europeanand Far Woolhas received Federal price sup­ a relatively high price. Eighty-two per­ Easternmills. portsince 1947 and mohair since 1949. cent of the Angora goatsin the United Mohair is usedalmost entirely in During the late 1940's and early 1950's, States are raised in Texas, mainly in the apparel, and thus its demand is strongly wooland mohair prices were supported Edwards Plateauregion in thesouthwest­ influenced by clothing trends. Mohair is using Governmentloan programs. Pro­ ernpart of the State. New Mexico and a desirable textile fiberbecause of its lus­ ducers were offered nonrecourseloans at Arizona rank a distant second and third. ter, resilience, wrinkle resistance, durabil­ the supportrate. If market prices were Altogether, the United States accounts ity, and feel. The finer grades are mostly belowthis level at the end of the loan for nearly 30 percentof world mohair used in summer-weight clothes and period,producers could forfeit their wool production. South Africais also a major sweaters. The coarser grades go into and keep the loan proceeds. (Program mohair-producing country, as is Turkey coats and suits. termsare explained in the Glossary.) to a lesser extent. All threenations Market prices were belowsupport rates during this time, sothe Commodity Credit Corporation(CCC) ended up with a lot of wool. Congressabandoned the loanprograms in 1954 when Govern­ ment-owned stocks of woolreached a level equal to half of a year'sproduction. The National WoolAct of 1954 authorized price supportfor wool and mohair by means of loans, purchases, payments, or other operations. From the start, directpayments have beenused. The change to supportingwool and mohair through payments rather than

January-March 1990 51 Wool and Mohair

loansallowed market prices to fall below � supportprice. The supportprice­ Understanding Support tractingthe farm price ($1.38) drrect payment methodwas a forerunner Payments fromthe supportprice ($1.78), of the target price-deficiency payment Wooland mohair producers then dividing that amount by the concept implemented for grains and cot­ receiveGovernment support in the farm price. In 1988, the payment ton in the 1970's. fonn of directpayments. Deter­ rate for shorn woolwas 0.29. This The methodof computing wool and mining theamount of this support means a producerwould receive 29 mohair paymentsdiffers from the proce­ is a multistep processinvolving cents in the formof a Government dure used to calculate crop deficiency bolhUSDA and producers. A supportpayment for every $1.00of payments,which equal a fixed amount hypothetical example of two farm­ greasywool marketed. (Greasy perunit of production. Instead, pay­ erssell ing shornwool may illus­ woolhas beenneither cleaned nor mentsfor wooland mohair increaseas batehow these payments aremade. scoured). the sales value of theproducer's fibers USDA calculates the national Since 1985, USDA has capped rises (see box). Theaim is to encourage supportprice forshorn wool using theper-pound sales value on which productionof higher quality, and there­ a formula specifiedby law. The payments can be made. For 1985- fore higher value, wool and mohair and first part of the formula utili1.es a 88, that cap has been set at four to improve their marketing potential. parity-index ratio: times the national average price. For example, farmer Johnson Changes In the Suppon Price AYmse parityiode1 for the J previous veaa has 100sheep, from which he Since 1955, the major legislative average parity index for 1958-60 obtained 800pounds of greasy changes in the wooland mohair pro­ woollast year. Selling this to his Thisis used to provide a current gr s have centered on how support '.1111 level of purchasing power.consid­ localcooperative, hereceived pnces are computed. From 1955 through ering the changes in prices over the $1,104($1.38 perpound). To 196 , they were set by the Secretary of ? past three decades. The index receive his support payment. he Agnc ture. During that time, the sup­ � includes prices paid by farmers for tookhis receipts to USDA's local port pnce forshorn wool remained con­ commodities. interest, Agricultural Stabilization and Con­ stant at 62 cents perpound. The law services. taxes. and farm wage rates. This servationService office. They cal­ required mohair to besupported at ratio is multipliedby 62 cents, the culated his payment by multiplying between85 and I 15 percentof the rate at supportprice in 1965, to give a sup­ thepayment rate, 0.29, by the which shorn wool was supported. This value of the woolhe sold,$1,104, portrate adjusted to current price resulted in mohair supportprices ranging yielding $320. levels. F

National Food Review 52 Wool and Mohair

1960's. By 1970, they had reached 72 centsa pound forwool and 80.2 cents for Figure 1. Market Prices for Shorn Wool Have Consistently Been Below Support Prices mohair. Dollars per pound Withthe gap betweengrowing sup­ 2.0 portprices andlower market prices wid­ ening eachyear (figure 1 ), the agricultural actsof 1970 and 1973 aban­ donedthe formula Instead,both wool and mohair supportprices were fixedat 1.5 1970's level through 1976. The Foodand Agriculture Act of 1977 returnedto theformula, setting the shornwool support price for1977-81 at 85 percentof theamount calculated by 1.0 theformula. TheAgriculture and Food Act of 1981 revisedthis computationfor 1982-85, basingthe shorn wool support price on 77.5 percentof the amount indi­ cated by the formula. TheFood Security 0.5 Act of 1985 again set the percentageat 77.5 for1986-90. Recent legislation low­ Average farm price' ered it to 76.4 percentfor 1988 and 1989. Beginning in 1977, the supportprice 0 for mohair was again set at a level 1955 60 65 70 75 80 85 between85 and 115 percentof the rate 'Average price received by producers. 1989 estimated. for shornwool. The supportprice has been established at the minimum-85 percent-since1977, except for 1981 through 1984, when it was supported at receiptswould raise operators' income price changes than doeswool production. 100percent. only 3 percent Thus, largechanges in This means it takes only a small drop in the expected price for woolwould benec­ the market price to raisedemand enough Effects of Programs on Producers essaryto elicit modestchanges in sheep to absorbthe extra production causedby Theobjective of the National Wool productionand wooloutput. large supportpayments. Act is to encourage productionof wool Becauseof theseunique featuresof Themohair program has not had as at prices that will assure a viable domes­ woolproduction, market prices would be large a cumulative effecton producersas tic industry. Woolproduction depends similar with orwithout the woolpro­ thewool program has had. The value of on the expected profitability of raising gram. As a result, producers receive mohair rose during the mid- and late sheep relative to the next best alternative, almostthe full benefitof the supportpay­ 1970's and for 9 years farm prices usually cattle or field crops. Sheep prof­ ments. Thereare two reasons why this remained abovesupport levels (figure2). itability dependson woolprices, wool happens. First, and foremost,U.S. wool However, since 1981, farmprices have supportpayments, lamb and sheep prices dependgreatly on foreignwool beenbelow the supportprice. Compared prices, and productioncosts. Because prices. The extra output caused by the with no program,it has encouraged pro­ only about30 percentof the annual woolprogram tends to replaceimported duction, lowered farm prices, raised pro­ income from a sheepoperation comes wool,rather than drive down U.S. prices. ducer receipts, and increased mohair fromwool, a IO-percentincrease in wool Second, wool demand respondsmore to exports.

January-March 1990 53 Wool and Mohair

$3. A mohair sweater sellingfor $150 Figure 2. Mohair Prices Rose During the 1970's may contain only a pound of raw mohair Dollars per pound with a farm value of $4. Because they accountfor soliule of finalproduct 6 value, changes in raw fiber prices are indiscernible to the average American customer. 5 Effects on Taxpayers However, astaxpayers, Americans 4 Average farm price' bearthe cost of Governmentexpendi­ tures for the programs. Theseexpendi­ tures are primarily a transfer of income 3 from taxpayersto wool and mohair pro­ ducers. Total wooland mohair program costswere $130 million during fiscal 2 1988. CCC expenditures for price sup­ portand related activities forall com­ modities were$12.5 billion that year. Thus,the wooland mohair programs accountedfor only about 1 percentof public expenditureson price supportand related programsduring 1988. ■ L7�5i...LLLJ L ...LLLJ-1_L_l__LJo85 19�sst--'-J_J�6:Co�-L...L�6�s_l.._...LL�70�_1___1_ so 'Average price received by producers. 1989 estimated. References Collon and WoolSituation and Outlook Report. ERS, USDA, various issues. Lawler, John and RobertSkinner. Wool Themohair program, on theother Impact on Consumers and Mohair:Background for 1990 hand, has greater benefitsfor consumers. The effectof the woolprogram on Farm Legislation, AGES 89-62. is is becausechanges in U.S. produc­ consumers is negligible. The small size � ERS, USDA, November1989. uon affectboth domestic and world of the domestic woolmarket relative to "Mohair: Summary of 1989 SupportPro­ mohair prices. Since 1981, themohair theworld marketand the substantialvol­ gram and Related Information." Com­ supportprice has exceeded market lev­ ume of U.S. wool imports suggest that modity Fact Sheet. Agricultural domestic woolprices are more related to els, causing greater productionthan if the Stabili1.ationand ConservationSer­ price supportprogram did not exist The world woolprices than to supportpay­ vice, USDA, April 1989. higher output pushed down mohair ments. Theadditional production caused Wool and Mohair Price SupportPro­ prices, enabling processorsand mills to by supportpayments probably has only a grams,Background and Policy Issues small, long-term effecton U.S. wool buy more at lower prices. for the 1990Farm Bill, 89-438ENP. e prices and likely causes domestic wool to � :ffecton consumers of any CongressionalResearch Service,July replaceimported wool in U.S. mills. declinem raw wooland mohair prices 28, 1989. causedby the program is lessened However, to the extent that thehigher "Wool: Summary of 1989 SupportPro­ becausetextile products are highly pro­ o tputcauses a short-term drop in U.S. gram and Related Information." Com­ � cessed. A typical woolsport coat selling pnces, textile mills benefit. modity Fact Sheet. Agricultural for $120 may containonly 4 poundsof Stabili1.ationand ConservationSer­ raw woolhaving a farm value of about vice, USDA, April 1989.

National Food Review 54