Report No. EC-109 Public Disclosure Authorized This report may not be published nor may it be quoted as representing the view of the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized WOOL, TRENDS AND PROSPECTS Public Disclosure Authorized August 30, 1962 Public Disclosure Authorized Economic Staff Prepared by: Frank Lowenstein ILE COPY WOOL. TRENDS AND PROSPECTS Table-of Contents Pages SUMAY ........................................ 1- ChapterI - Wool Production . ... ...... ... Distribution of Production . 4 - Sheep Numbers . 8 - Output of Wool per Head of Sheep . 9 - Effects of Prices and Cost of Production . 10 - Future Production ............ 13 ChapterII - Consumption Trends .......... 14 - Growth of Wool Consumption in the Past . 14 Data on Wool Consumption and Data on Forces Affecting Wool Consumption . 15 - Causes of Changes in Wool Consumption in the Free World . .... ... 16 - Wool Consumption in the Communist Bloc . 24 Future World Consumption .9 24 - Chapter III - Prices ........ .. ,..... 28 -. Projection of Prices . 31 - Chapter IV - Trade . .................... 33- Anne,c A - Growth Rates ................. Introduction ........... 35 Measurement of Growth . 35 &ipirical Proof . 37- Continued TABLE OF CONTENTS (CONTtD) Charts Included in Tort Page 1. World: Wool Production, Number of Sheep and Output per Sheep 5 2. Free World: Wool Production, Number of Sheep, and Output 6 per Sheep 3. Communist Bloc: Wool Production, Number of Sheep, and Output 7 per Sheep 4. World: Synthetic Fiber Production 20 5. Selected Areas: Synthetic Fiber Production 21 6, United States: Prices for Orlon, Dacron, and Wool 30 A-1 Wool Production: Actual and Trend Values for Selected 38 Countries STATISTICAL APPENDIX 40 - SUNNARY Since the end of World War II production of wool has grown at an annual rate of about 3.3% a year, while consumption of wool has grown at about 1.9% a year. Much of the growth in production and the growth in consumption has occurred in the Communist Bloc. Free World Production of wool has grown at a rate of about 2.6% a year while consumption has growm at about 1.3%, compared with growth in population of about 1.8%. Per capita consumption of wool in the Free World has declined during the post World War II period from about 3.1 pounds in 1948 to 2.7 in 1960. Despite the rapid increase in production in the Communist Bloc, about 7% a year, consumption has grown even faster - rising at a rate of about 8.5% a year. As a result of the more rapid growth of consumption, imports by the Communist Bloc from the Free World have increased rather steadily since 1948. Although little is known about the forces which affect wool consumption within the Communist Bloc, it appears likely that wool consumption will continue to increase more rapidly than wool production. Synthetic fiber consumption grew very rapidly during the 1950's and will continue to grow rapidly during the 1960's. The growth in synthetic fiber consumption is primarily responsible for the decline in per capita wool consumption in the Free WJorld. Consumer income has increased rather steadily since the end of World War II and wool prices have tended to decline rather steadily since the end of the Korean War. The effects of these forces, which otherwise would have caused higher wool consump- tion, were more than counter-balanced by the rise in synthetic fiber consumption. From 1950 to 1960, world production of synthetic fibers increased by almost 900% - rising from 153 million pounds to 1,565 million. By 1963 production is expected to be more than double that of 1960. More than 93% of the world's production has been, and through 1963 will continue to be, manufactured in the Free World. Costs of manufacturing synthetic fibers in relation to selling prices are quite low. The low cost-price ratio has stimulated rapid expansion of manufacturing capacity. In addition, prices for synthetic fibers have been maintained at a competitive level with prices for wool. Because the synthetic fiber producing industry has many elements of monopolistic competition, prices for synthetic fibers have shown only moderate declines. With the low cost-price ratio, sharper declines probably would have occurred if the industry were not characterized by relatively few firms and administered prices. Much of the increase in Free World wool production was caused by higher efficiency in sheep raising. The higher efficiency has resulted in more sheep per acre of pasture land and, in some of the lower yield- ing countries such as South Africa, more wool per head of sheep. Further improvements in the efficiency of producing wool probably will be deve- loped in the future. Improvedefficiency in wool production has largely offset the rise in the prices paid by sheep farmers in Australia and New Zealand. Despite the steady rise in the prices paid by farmers, sheep farming has continued to be the most profitable farming enterprise in the sheep ranching areas of these two countries. Prices for wool generaIly have declined since the Korean War. Actual prices reached their peak in 1951 and real prices were at their high point in 1950. In 1960, the annual average price for 64ts/70's at London in real terms was 48% of the 1950 average. The actual price was 44% of the 1951 average. Prices increased slightly in 1961 and the real price was 49% of the 1950 average. In general, the differentials between the lower quality and higher quality wools have been narrowing since 1952. At Australian auctions in 1956, for example, 50's were about 49% of the price of 64bs good combing. In 1960, this proportion was about 75%. A similar move- ment occurred for prices for 56's, rising from about 60 to 81% of the price for 64ts from 1952 to 1960. It appears, however, that this narrowing of differentials has about run its course. Additional narrowing of significant proportions probably will not occur. By 1970 per capita consumption of wool in the Free World may be slightly higher than in 1960. In general, this projection assumes relative increases in consumer income of the same or somewhat smaller magnitudes than occurred during the 1950's, some decline in wool prices, and synthetic fiber production in the Free lTorld three to four times that of 1960. Although synthetic fiber consumption will rise rapidly in the decade of the 1960's, its percentage increase is expected to be only about 1/3 of its percentage increase in the 1950's. The rising consumption of synthetic fibers in the 1960's probably will not depress the consumption of wool as much as it did in earlier years. Under these circumstances wool consumption per capita would increase slightly. Increases in Free World population would cause considerably larger wool consumption. By 1970 Free W4orld wool consumption would be 3,002 to 3,206 million pounds (clean basis) compared with 2,h72 million pounds in 1960. In addition, exports to the Communist countries probably will be more than 200 million pounds. Total wool requirements from Free World producers would be about 3,200 to 3,h00 million pounds, 23 to 31% above 1960 and would have a growth rate of 2.1 to 2.7% a year. Production in the Free World would increase at a rate of about 2.5% per annum. Thus, production is expected to increase at approximately the same rate as demand for wool. By 1970, production in the Free World would be about 5,700 million pounds, greasy basis, or equivalent to approximately 3,300 million pounds, clean basis. In 1961, production was approximately 4,5 80 million pounds, greasy basis, or 2,637 million, clean basis. - 3 - Prices for wool will tend to decline, principally because of the pressure from synthetic fibers. Declines in prices for synthetic fibers are expected to be moderate because of the very limited competition within the synthetic fiber producing industry. Large capital investments are required for expansion and there are relatively few firms engaged in producing synthetic fibers. Therefore, the industry probably will continue to be one characterized by many elements of monopolistic competition, one of which is administered prices. The decline in prices for wool probably will be mild. The fall probably will be close to 1% a year. Thus by 1970, in terms of the 1961 general price level, prices for 6hts/70's at London may be around 90 pence. This price compares with 99 pence in 1961e - 4 - CHAPTER I Wool Production World production of wool has been increasing steadily since the end of World War II. Production in 1961 of 5.7 billion pounds was the largest production since the end of World War II and was 49% larger than average annual production from 1934 to 1938. (See table lo) From 1948 to 1961 wool production in the world increased at an annual rate of about 3.3?/1 a year. (See table 2.) For the world, as a whole, sheep numbers increased at an annual rate of about 2.1% and output per head of sheep increased at a rate of 1.3% a year. (See tables 3 and 4, and Figure 1.) Rapid rates of increase in sheep numbers occurred in the Communist Bloc, the United Kingdom, Australia, and New Zealand. Australia and New Zealand have relatively high yields of wool per sheep while the Communist Bloc and the United Kingdom are below the world average. Distribution of Wool Production Wool production in the Communist countries expanded more rapidly than in the Free World, rising by about 132% or 0O6 billion pounds (greasy basis) from 1948 to 1961.