The New Zealand Wool Marketing Study Group was set up in December, 1964 to investigate and report on all relevant aspects of wool marketing. The terms of reference of the Wool Marketing Study Group included the requirement that they should examine methods of containing wool price fluctuations whilst retaining the existing auction system as the basic method for the disposal of wool. The present study, supported in part by the Wool Marketing Study Group, examines what the effect would have been if alternative Wool Commission floor and ceiling price policies had been in force at New Zealand wool auctions for the historical period 1952/53 through 1965/66. [From Introduction

Durbin, Sidney Ian

English

Massey Research Online

Copyright is owned by the Author of the thesis.  Permission is given for a copy to be downloaded by an individual for the purpose of research and private study only.  The thesis may not be reproduced elsewhere without the permission of the Author.  A SIMPLE WOOL MARKEI'ING SIMULATION MODEL A Thesis Presented in Partial ]ulfillment of the Requirements for the Degree of Master of Agricultural Science at Massey University by Sidney Ian Durbin August, 1969 ACKNOWLEDGEMENTS The author wishes to thank his supervisor, Professor w. v. Candler, for the invaluable assistance received throughout the course of this study, particularly since almost all supervision was conducted by correspondence . Financial assistance was provided by the Wool Marketing Study Group, and this i s gratefully acknowledged. Finally thanks are due to Mrs . Sue Nano for her efforts in typing the thesis, and to the autbor 1 s vri.fe who sbDrcd the burden of proof rending. CHAPTER 1 1. 1 1. 2 1. 3 CH.APTER 2 2.1 2.2 2. 2.1 2. 2. 2 2.2. 3 2.3 2.4 2. 4. 1 2. 4. 2 2. 4. 3 2.5 2. 5.1 2.5.2 2.6 2.7 CHAPTER 3 3.1 3.2 3.2.1 3. 2. 2 TABLE OF CONTENTS INTRODUCTION Introduction Aim of the Study Thesis Guide THE WOOL MARK.FUNG SYSTE'd: A REVI'EN OF LITERATURE Introduction Technological Aspects of the Wool Marketing System Preparation of Wool for Processing The Production of Gannents The Production of Carpets Fluctuations in Wool Price Empirical Es timates of the Price Elasticity of D&uand Study by Horner Study by the Bureau of Agricultural Economics Study by McKenzie The Availability of Subs ti tut es :for Wool Technological Competitiveness of Fibres Studies of Market Penetration by Synthetics The Reference Cycle Approach Summary Page 1 1 2 5 6 ,~6 ~7 _9 11 ,J 7 18 23 28 35 _]5 37 41 45 THE AUCTION SUB-SYST:EM AND ALTERl.~ATIVE MARKETING POLICIES Introduction 47 Growers t Supply of Wool 48 Production of Wool Disposal of Wool 48 49 (i) 3.3 3. 3.1 3.3.2 3.3.3 3.3.4 3.3.5 3.3.6 3.3.7 3.4 3. 4.1 3. 4. 2 3. 4. 3 3.4.4 3. 4. 5 . 3. 5 3. 5.1 3.5.2 3.5.3 3.5.4 3. 5. 4. 1 3. 5. 4. 2 3~6 3.7 3.7.1 3.7.2 3.7.3 3.8 (ii) Page A Description of Sale by Auction 49 Classification of Wool 50 Preparation and Display of Wool 50 Distribution of Lot Sizes Sold at Auction 51 Seasonal Distribution of Wool Types Sold at Auction 52 Auction Sale Procedure 53 Activities of Buyers 53 Activities of Wool Commission 54 Demand for Wool at Auction 54 A Model of Buyer Behaviour at Auction 55 Purchasing Arrangements 56 The Speculative Component of Demand at Auction 57 Formulation of a Demand Function for Wool 58 Effect of Wool Connnission1 s Policies on Demand 60 Alternative Wool Marketing Policies Within the Auction Sub-System 62 The History of Wool Price Stabilisation in New Zealand 63 Deficiency Payment Scheme 64 Stabilised Payout Scheme 64 Floor and Ceiling Price Policies 65 Objectives of Floor/Ceiling Price.Policies 66 Alternative Floor and Ceiling Price Policies 70 Summary Measures 72 A Review of Simulation Studies of the Wool Auction 76 Study by Dulay and Parish 76 Study by Powell and Campbell 80 Study by Dulay and Nevil e 82 SUDL1ary 82 CHAPTER 4 4.1 4. 2 4. 3 4.4 4. 4.1 4. 4. 2 4. 4. 3 4.5 4.5.1 4.5.2 4. 5. 3 4. 5. 3.1 4.5.3.2 4.6 CHAPTER 5 5.1 5.2 5.3 5.3.1 5.3.2 5. 3. 3 5.3.4 5.3.5 5.3.6 5.4 5. 4.1 5.4.2 THE USE OF SIMULATION IN RESEARCH Introduction The Philosophy and Scope of Systems Analysis The Method of Systems Analysis Simulation Simulation: A Descriptive Technique (:i,:ii' Page 85 85 87 88 88 Where Simulation is Appropriate 89 Flexibility of Simulation 90 The Method of Simulation 91 Construction of the Model 92 Operation of the Model 93 Drawing Conclusions from the Model 95 Deriving Conclusions Within the Context of the Model 95 Relating Conclusions from the Model to the Real World 97 Swnmary 98 THE SIMULATION MODEL Introduction 99 Data Used 99 The Quantitative Balance 101 Grower Supply Function 101 Normal Trade Demand Function 102 Net Speculative Demand/Supply Function 104 Wool Commission Demand/Supply Function 106 The Auction Identity 106 Calculation of Simulated Price 107 Algebra of the Quantitative Balance 107 Grower Supply Equation 107 Net Speculative Demand/Supply Equation 108 5.4.2.4 5.4.2.5 5.4.2.6 5.4.3 5.4.4 5. 4. 4. 1 5. 4. 4. 2 5. 4. 4. 3 5. 4. 4. 4 5. 4. 5 5. 4.6 5. 4. 6. 1 5. 4. 6. 2 5. 4. 7 5. 4. 7. 1 5. 4. 7. 2 5.5 5.6 5.6.1 5.6.2 CHAPTER 6 6.i 1 6.2 Interactions Between Net Speculative Demand and Simulated Price Simulated Price Between Floor and Ceiling Simulated Price Above Ceiling, No Wool Commission Stocks Simula ted Price at Floor Simulated Price at Ceiling Simulated Price Above Ceiling, Some Wool Commission Stocks Net Speculative Inventory Equation Wool Commission Demand/Supply Equation Alternative Floor and Ceiling Price Policies Rigid Floor and Ceiling Price Policies Flexible Weekly Floor and Ceiling Price Policies Flexible Seasonal Floor and Ceiling Price Policies Wool Commission Inventory Equation Normal Trade Demand Equation Constant Elasticity of Demand Model Linear Demand Model Calculation of Simulated Price Constant Elasticity of Demand Model Linear Demand Model Calculation of Financial Implications Inclusion of Summary Measures Available Summary Measures Summary Measures Reported REALISM OF THE MODEL Introduction Supply Jfunction Page 109 110 111 112 113 11 4 114 115 11 6 11 6 117 11 8 120 120 121 121 122 123 125 126 129 129 132 134 135 (iv) 6.3 6.4 6.5 CHAPTER 7 7.1 7.2 7. 2.1 7. 2. 2 7.2. 3 ,7.3 7.4 7. 4. 1 7. 4. 2 7. 4. 2 . 1 7. 4. 2. 2 7. 4. 2. 4 7.4.2.5 7. 4. 3 7. 4. 3. 1 7.4.3.2 7.4.3.3 7.4.3.4 7. 4. 4 Norm.al Trade Demand Function Wool Commission Demand/Supply Function Net Speculative Demand/Supply Function ANALYS IS OF SIMULATION RJNS Introduction The Performance Function Technique Aim of the Performance Function Technique Derivation of the Perfonnance Function Analysis of the Performance Surface Indices of Success Nuruerical Results Analyses Performed and Information Recorded Fixed Floor and Ceiling Prices - No Net Speculative Activity Parameters Varied Parameters Held Constant Estimation and Analysis of Performance Functions Conclusions f:rom Simulation Runs Conclusions from Analysis of Performance Functions Fixed Floor and Ceiling Prices - Net Speculative Activity Parameters Varied Parameters Held Constant Equations of Performance Functions Conclusions from the Simulation Runs Variable Weekly Floor and Ceiling Prices - No Net Speculative Activity Parameters Varied Page 136 138 140 145 145 146 14-7 150 153 155 155 156 157 157 157 168 170 171 171 172 172 175 175 175 ( v) 7. 4. 4. 2 7. 4. 4. 3 7. 4. 4. 4 7. 4. 5 7.4.5.1 7. 4. 5. 2 7. 4. 5. 3 7. 4. 5. 4 7.5 7.5.1 CHAPTER 8 8.1 8 .2 8.3 8.4 .BI.BLIOG RAPHY Parameters Held Constant Equations of Performance Functions Conclusions from Simulation Runs Variable Weekly and Seasonal Floor Prices - No Net Speculative Activity Parameters Varied Parameters Held Constant Equations of Performance Functions Conclusions from Simulation Runs Directional Results l!'ixed Floor and Ceiling Prices - No Net Speculative Activity Fixed Floor a...Dd Ceiling Prices - Net Speculative Activity Variable Weekly Floor and Ceiling Prices - No Net Speculative Activity Variable Weekly and Seasonal Floor Prices - No Net Speculative Activity Summary CONCIDSIONS Introduction Conclusions Within the Context of the Model Implications of the Realism of the Model Conclusions for the Policy Maker Page 176 176 179 179 179 180 180 181 18!~ 184 187 190 192 19,t 196 196 197 198 200 ( vi) APPENDICES A B C Flow Diagrams for the Computer Simulation Programmes vv'MSM -J<· 4, 5, 6 and 7 Index of Symbols used in the Model Partial Listing of Data Used (vii) Page A1 B1 C1 Table 2.1 2.2 2.3 2.4 3.1 3.2 7.1 7.4 7.5 LIST OF TABL:ES Correlations Between Weekly Average Prices of Selected Wool Types Number of Peaks and Troughs Representing Price Move-ments of less than 2d, 2d to less than 5d, 5d to less than 10d and 10d or more Correlations and Maximum Serial Correlations Amongst Wool, Futures, Tops and Yarn Prices A Comparison of Physical Properties of Wool and Synthetics Distribution of Sizes of Lots Sold at Auction The Highest Sustainable Reserve Price with Capital Backing of £80 million Numerical Results of Simulation Runs; Fixed Floor and Ceiling Prices, No Net Speculative Activity; Lineor (viii) Page 13 14 15 36 52 79 Demand - Composite Design A 159 Numerical Results of Simulation Runs i Fixed Floor and Ceiling Prices, No Net Speculative Activity; Linear Demand - Composite Design B Numerical Results of Simula tion Runs; Fixed Floor and Ceiling Prices, No Net Speculative Activity; Constant 160 Elasticity of Demand - Composite Design A 161 Numerical Results of' Simulation Runs; Fixed Floor and Ceiling Prices, No Net Speculative Activity; Constant Elasticity of Demand - Composite Design B 162 Estimated Regression Coefficients; Fixed Floor and Ceiling Prices, No Net Speculative Activ.i ty; Linear Demand 163 (ix) Table Page Estimated Regression Coefficients; Fixed Floor and Ceiling Prices, No Net Speculative Activity; Constant Elasticity of Demand 164 7. 8 Analysis of Performance Function - Linear Demand; Using Function with A 1: With a 1 (= Log (-A 1)) Analysis of Performance Function - Consta..~t Elasticity of Demand; Using Function With A 1: With a 1 (= Log ( -A1)) Numerical Results of Simulation Runs; Fixed Floor and Ceiling Prices, Net Speculative Activity - Linear Demand 7. 10 Numerical Results of Simulation Runs; Fixed Floor and Ceiling Prices, Net Speculative Activity - Constant Elasticity 7. 11 Numerical Results of Simulation Runs; Variable Weekly Floor and Ceiling Prices, No Net Speculative Activity -Linear Demand 7.12 Numerical Results of Simulation Runs; Variable Weekly Floor and Ceiling Prices, No Net Speculative Activity -Constant Elasticity 7.13 Numerical Results of Simulation Runs; Variable Weekly and Seasonal Floor Price, No Net Speculative Activity -Linear Demand 7.14 Numerical Results of Simulation Runs; Variable Weekly and Seasonal Floor Price, No Net Speculative Activity -Constant Elasticity 7. 15 Directional Indication of Model Outcomes - Linear Demand; Constant Elasticity; Fixed Floor and Ceiling Prices, No Net Speculative Activity 165 166 173 174 177 178 182 183 186 Table 7 .16 7 .17 Directional Indication of Model Outcomes - Linear Demand: Constant Elasticity; Fixed Floor and Ceiling Prices, Net Speculative Activity Directional Indication of Model Outcomes - Linear Demand: Constant Elasticity; Variable Weekly Floor and Ceiling Prices, No Net Speculative Activity 7 .18 Directional Indication of Model Outcomes - Linear Demand: Constant Elasticity; Variable Weekly and Page 189 191 Seasonal Floor, No Net Speculative Activity 193 (x) Figure 2. 1 2. 2 2. 3 2. 4 3. 1 5. 1 LIST OF FIGURES Flow Chart Illustrating the Main Manufacturing Processes in the Wool Industry Flow of Wool in Carpet Production Example of Logistic Curve Cyclical Activity in Topmaking, Spinning and Weaving Sectors Conditions for Profitability of Price Stabilisation Iterative Calculation of Simulated Price (xi) Page 8 10 38 43 67 124 CHAPTER 1 INTRODUCTION 1.1 Introduction The New Zealand Wool Marketing Study Group was set up in December, 1964 to investigate and report on all relevant aspects _of wool marketing • . The terms of reference of the Wool Marketing Study Group included the requirement that they should e:xa.mine methods of containing wool price fluctuations whilst re-taining the existing auction system. as the basic method for the disposal of wool. The present study, supported in part by the Wool Marketing Study Group, examines what the effect would have been if alternative Wool Co:cJDission floo r and ceiling price policies had been in force at New Zealand wool auctions for the historical period 1952/53 through 1965/66. 1. 2 Aim of the Study The aim of the study was t o develop and test a wool marketing simulation model which would describe and SUI,ll!larise the performance of the New Zealand wool market, at auction, under a variety of demand conditions and Wool Commissiqn floor and ceiling price policies. This involved: (a) The construction of a s~ation model which would incorporate some of the more i.raportant features of the New Zealand wool market, with sufficient flexibility to allow for; (i) the implementation of different decision nues (policy parameters) for the purchase and sale of wool by the Wool Commission, and (ii) the inclusion of structural parameters to indicate the magnitude and direction of the responsiveness of the wool trade to price movements ~a. to the various Wool I Commission policies. (b) Inclusion in the model of measures, such as average price and variance in price, which would be important in sU!illTiarising the ·1 2. outcome of each Wool Commission policy (or simulation run), and in indicating if and how these policies were significantly different from what actually happened over the historical period being con-sidered. (c) The conversion of the model to cooputer programmes. ( d) Running the sinulation progratJmes for a variety of parameter (value) coobinations, (representing Wool Co:r:Elission policies and market demand conditions). ( e) A ttem.pting to infer from the sir:mlation runs, for the period being considered, what Wool Commission policies would have been viable, and what would have been the effect of changes in deoand for wool brought about by the Wool Co:DI!lission 1 s policies. The ain of the study was not to estir.late or conclude what values of the parameters are the "right" ones for the New Zealand wool r.iarket, rather it ·was to make "if ••• . , then • ~. 11 statem.ents; if these had been the conditions ruling, then this would have been the outcome. 1.3 Thesis Guide This section indicates the manner~ which the thesis is presented. Chapter 2 is priL:larily a review of sooe of the literature on wool mar-keting. The aim of the chapter is to acquaint readers with the context of the present study. The chapter reviews studies which have documented the extent of wool price fluctuations at auction-in New Zealand, and studies which have attempted to SUI!lillarise or explain the relationship between the deoand for wool and wool prices. Chapter 3 describes in sone detail the operations of New Z~alnnd wool auctions. The chapter also includes a consideration of price stabilisation 3. scheraes, particularly floor and ceiling price policies, which could be super-lllposed on the wool auction. Measures which would summarise the performance of auction under alternative floor and ceiling price policies are then discussed. A nUL1ber of sIDulation studies which investigate the effect of alternative floor and ceiling price policies have been carried out within the context of the Australian wool auctions, and Chapter 3 concludes with a review of these studies. Chapter 4 discusses the salient features of the use of simulation in research. The chapter demonstrates how simulation under certain conditi ons can 3nable the researcher to generate information which would otherwise be diffi-!ult or mpossible to obtain. A description of iraportant aspects of the ,onstruction and operation of a siraulation model, t ogether with the method of lra.wing conclusions from the numerical results obtained, is also presented. · Chapter 5 details the construction of the Wool Marketing Simulation [odel used in this study. For the purposes of presentation the three parts of ;he model are described individually. The first part t o be presented is the .uantitntive balance which accounts for all wool sold at auction in a given •eek by calculating first the price at which th~ market will be cleared , and hen the anount of wool bought by the wool trade'and the residual bought or sold y the Wool Commission. The second part to be described is the inclusion of inancial or revenue iraplications of the quantitative balance. Finally, ten ummary measures are described in tems of variables in the nodel. Chapter 6 comments on the realism of the model, in particular the quan-itative balance. Chapter 7 provides an analysis of the results obtained from running the imulation model for various parameter combinntions. Two methods of inference are used in interpreting the res'U.lts from a series of simulation runs. The 1apter can be divided into two distinct parts. The first part discusses the 1eoretical background to the two methods, while the second part records the empirical results obtained by using them. Chapter 8 concludes the thesis by sULEJ.arising priefly the inferences which can be drawn f'rom the study. ' 

A simple wool marketing simulation model : a thesis presented in partial fulfillment of the requirements for the degree of Master of Agricultural Science at Massey University

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A simple wool marketing simulation model : a thesis presented in partial fulfillment of the requirements for the degree of Master of Agricultural Science at Massey University

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