The Australian Wool Corporation's Reserve Price Scheme: An Assessment of Price Stabilisation and Producer Benefits

Abstract

This paper presents a new framework for evaluating the producer benefits from price stabilisation schemes. The methodology includes formulae for explicitly characterising the floor price feature typical of such schemes. This methodology is applied to an analysis of the Australian Wool Corporation's (AWC) Reserve Price Scheme (RPS) for wool. Using post intervention data to generate values of ex ante (unstabilised) and ex post (stabilised) price variability, results indicate that the coefficient of variation of wool prices has declined in response to the operation of the RPS by 41 per cent. A large decrease in price instability from historical levels to the level estimated in this paper is also observed. It is suggested that some of this reduction in price instability may be attributed to an existence effect of the RPS. As a consequence, ignoring this existence effect may lead to an understatement of the benefits from price stabilisation