SUBSTITUTION BETWEEN WOOLS OF DIFFERENT FIBRE DIAMETER¹

Abstract

The extent to which wools with different fibre characteristics can be substituted in textile production and consumption holds implications for Australia's international and domestic marketing policies. An analysis of price-induced substitution between Australian wools of different fibre diameters was conducted. Fibre diameter was used to parameterise cross-price relationships in order to estimate a system of demand equations for wools by diameter class. The results indicate that direct substitution takes place within a very limited range of fibre diameters. The use of product characteristics to parameterise price relationships may be extended to other graded commodities.The degree to which fibres can be substituted in textile production and consumption is an important factor influencing the demand for raw wool in Australia. Substitution can relate to competition between different grades of Australian wool and those produced by other exporters as well as competition between wool, synthetic and other natural fibres. The subject of this paper is the price-induced substitution relationships between Australian wools of different fibre diameters.Wool varies in a wide range of attributes which affect its processing characteristics and the quality of final products. Fibre diameter is the most important physical attribute of wool, as it closely governs the spinning capacity, strength and texture of yarns (Skinner 1965). Fibre diameter is inversely related to other important physical characteristics of raw wool, such as fibre length and strength. The demands for different grades of wool are closely related, but different grades are not perfect substitutes. Substitution in the production and consumption of textile products is reflected in relative price movements which occur in response to shifts in wool supplies and in the demand for final products.Substitution between wools of different fibre diameter has direct implications for Australia's international and domestic marketing policies. Richardson (1 98 1) discusses a number of implications of imperfect substitution between domestic wools for the efficient operation of the reserve price scheme. Issues regarding appropriate levels of price stabilisation for various wool types and the composition of stocks held by the Australian Wool Corporation depend, in part, on the extent of substitution within domestic wools. The Bureau of Agricultural Eonomics (1987) found that estimates of returns to wool growers from their cooperative expenditure on promotion are particularly sensitive to assumptions made about the substitutability of wools which are classified as apparel or non-apparel, on the basis of fibre diameter. 56Copyright 1990 The Australian Agricultural Economics Society SUBSTITUTION BETWEEN WOOLS OF DIFFERENT FIBRE DIAMETER 57A major difficulty in estimating demands for graded commodities is the degree of collinearity between prices. This collinearity is natural, resulting from substitution in demand and common sets of determinants of both demand and supply. To overcom...

Valuing quality attributes of Australian merino wool

“…The signs and magnitudes of coefficients for variables that have been measured previously are consistent with those reported in earlier studies (for example, Angel et al 1990;Beare and Meshios 1990;Gleeson et al 1993;Hansen and Simmons 1995;Simmons and Hansen 1997). The results for those variables not previously measured are generally in line with expectations and indicate that discounts accrue to lots contaminated with branding fluids, unscourable colour and vegetable matter.…”

“…Simmons (1980) and Bramma et al (1985) found statistically significant price premiums and discounts associated with wool of differing fibre diameter and level of vegetable matter content, and Beare and Meshios (1990) allowed for substitution between fibre diameters. Angel et al (1990) and Stott (1990) found statistically significant price premiums and discounts associated with the staple measurement characteristics of length and strength, and Angel et al (1990) also considered arbitrage in the Australian and New Zealand markets and the relevance of end use.…”

“…The hedonic pricing method has been applied in a number of studies which focus on statistical relationships between wool characteristics and price in the Australian wool market, and because the Ladd and Martin approach values attributes of a good as purchased not for final consumption, but as inputs into further production, it is particularly appropriate for an analysis of the value of wool attributes (Beare and Meshios 1990). Simmons (1980) and Bramma et al (1985) found statistically significant price premiums and discounts associated with wool of differing fibre diameter and level of vegetable matter content, and Beare and Meshios (1990) allowed for substitution between fibre diameters.…”

“…Others have estimated the costs and benefits of more extensive objective measurement and of market innovations (for example, Jackson and Spinks 1982;Spinks and Lehmer 1986;Gleeson et al 1993). Other methods have been employed to investigate elasticities of substitution between wools of different diameters (Beare and Meshios 1990) and to analyse longer term behaviour of wool prices (for example, Bardsley and Olekalns 1996;Chang 2000).…”

“…The hedonic pricing model is a well-established method for analysis of the implicit demand for wool quality characteristics (see, for example, Beare and Meshios 1990). We employ the same model, using data relating to sale lots of fleece wool sold through the Australian Wool Exchange (AWEX) in the 2008-2009 selling season.…”