Journal of the Department of
Agriculture, Western Australia,
Series 4
Volume 38 | Number 1
Article 7
1997
Wheat and wool prices : lessons from the past
Ross Kingwell
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Recommended Citation
Kingwell, Ross (1997) "Wheat and wool prices : lessons from the past," Journal of the Department of Agriculture, Western Australia, Series 4:
Vol. 38: No. 1, Article 7.
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Historical information about
wool and wheat prices can
help farmers to plan and
manage their wheat and wool
production. Ross Kingwe/1
describes some management
lessons derived from
analysing wheat and wool
price movements.
Historical prices
A conventional view of commodity
prices is that they follow a bellshaped distribution (see Figure 1).
In such a distribution most prices
received by the farmer are close to
the average or mean price and the
farmer has an equal chance of
receiving a price higher or lower
than the mean price.
However, analyses of wool and
wheat prices reveal that their
distributions, particularly for wool,
are not the typical bell-shape.
Rather their distributions are
skewed (see Figures 2 and 3).
There is a greater chance of
receiving a lower price than a
higher price, yet there are brief
periods of very high prices.
Viewing historical prices
(especially for wool) reveals there
are fairly long periods of relatively
low prices and much briefer
periods of very high prices.
In Western Australia since 1906
very high wool prices have been
observed for only a small number
of years in the late 1940s and early
1950s, and high prices have
occurred in 1924, 1925, 1973, 1974,
1988 and 1989 (see Figure 4). A
study of Victorian wool prices
from 1885 until 1969suggests
sharp but brief booms in wool
prices are expected about once in
30 years.
For wheat, very high prices were
recorded in Western Australia in
the decade following World War II
and other years of high prices
were 1915, 1921, 1937and 1974 and
1975 (see Figure 5). For wheat and
more especially for wool there are
long periods when prices are fairly
low or moderate and in these
periods price changes between
years are not dramatic. Then there
are often brief periods of very high
prices. Why is this the pattern of
price movements ?
14
12
..,
!!!10
~
oa
Figure J. A bell·
shaped
distribution of
prices.
.8E
~ 6.
4
140 14975 159.5169.25 179 188.75198.5 206.25 218 22775
Price (Sltonne)
28
W.A.JOURN..\LOfAGRICULTURE VoL38 1997
Productloo stocks and
demand
The answer Ii
hiefly in the
interaction between stocks,
production and demand changes.
When weather conditions are
favourable for wheat and wool
production in the countries that
are the major exporters of these
commodities then the increased
supply of these commodities onto
markets usually causes a fall in
their market price. In these
situations where the supply of
wool or wheat is high relative to
demand, it becomes relatively
cheap to buy and store the
commodity. If these stockholdings
are large enough then they in tum
depress prices. These low prices
ensure that storage remains
attractive and hence low prices
tend to persist from year to year.
The role of stocks in influencing
the prices of storable commodities
has long been recognised. For
example, the Commonwealth
Government's Year Book for 1939
states "The collapse in the price of
wheat which occurred between
1928 and 1931 was chiefly due to
the accumulation of stocks in
exporting countries" (p.618).
On the other hand, widespread
unfavourable weather conditions
for wheat and wool production or
a rapid increase in demand or a
rundown in stocks or some
combination of these changes, can
cause prices to jump suddenly. For
example, the period of high prices
for wool and wheat in the years
immediately following World War II
were due to the rapid increase in
demand for these commodities as
part of post-war reconstruction,
plus there was an additional
military demand for wool due to
the Korean War. Another example
of very high prices resulted from
the 1914 drought that affected
most Australian States. This severe
20
15
~~~I
Ii;[
0
z
10
E
::,
z
5
0
60
90 120
150 180 210 240 270 300 330 360 390 420
real prices for meat by 9 per cent.
Hence the price trend experienced
by many farmers will cause them
to increasingly rely on research,
innovation, technology,
sustainable practices and
management improvement as a..
means of maintaining farm profits
in the face of a continued
downward trend in prices.
Occasionally, against this trend,
price spikes will occur.
Price ($/tonne)
Figure 2. Detrended real wheat prices.
20
w 15
....
ca
~
0
ai 10
.c
E
:::,
z
5
O
200 250 300
350
Implications for
management
The nature of the price
distributions for wheat and wool
with their infrequent price spikes
mean that in the lifetime of a
farmer there may be only a handful
of years when prices are markedly
high. These years are unique and
provide a farmer with a brief
'window of opportunity'. Some
farmers will be fortunate to
experience favourable seasons
when they also receive these high
prices. Others will experience the
high prices when seasons are poor
or mediocre. Nonetheless often the
profits a farmer earns in these high
price years act as a store of wealth
that the farmer can draw upon in
subsequent leaner years.
The decisions made by a farmer in
these periods of high prices and in
the immediately subsequent years
Figure 3. Detrended real wool prices (c/kg greasy).
can greatly affect the future
viability or prosperity of their
drought led to virtually no wheat
strong demand and a stockout, as a business. Hence, one lesson from
being available for export from
pronounced permanent structural
the history of price movements for
Australia in 1915. The low
shift in demand.
wheat and wool is that a farmer
production and low stocks, yet
can greatly affect his prosperity by
increased demand from Australia
Underpinning and influencing the
capitalising on the limited number
and overseas, caused wheat prices interaction of production. stocks
of very favourable price years he
to increase sharply.
and demand is a host of factors.
will experience as a farmer.
Among these factors are exchange
Because these windows of
Occasionally a price spike
rates, the income status of
opportunity do not last long, often
associated with a run down of
purchasers. research and
decisions will need to be made
stocks is interpreted wrongly as a
technology innovation. prices of
sooner rather than later and
lasting increase in demand for the
substitutes and tariff and subsidy
tactically rather than strategically.
commodity. This is what seemed
policies in exporting and importing Although when a pronounced
to have happened for wool when
countries. All these factors interact rundown in stocks occurs, then a
the Minimum Reserve Price was
to influence the real price received farmer might prepare strategic
increased from 508 c/kg in 198&-7
by farmers for their wheat and
farm plans to capitalise on the
to 870 c/kg clean in 1988-9 (an
wool.
increased likelihood of higher
increase of more than 70 per cent).
prices often associated with lower
Those responsible for setting the
Since the 1950s real prices for
stocks.
floor price appear to have made
wheat and wool have declined. The
the classic error of interpreting the International Food Policy Research However, more often farmers will
temporary price spike, caused by
Institute is predicting that between have little anticipation of a price
1990 and 2020 real prices for
spike and less knowledge about
cereals will fall by 19 per cent and
the duration of the spike.
Price (dkg greasy)
WA JOlJ'R'iAL OF AliRICULTURE Vol. 38 1997
29
3250
-
~-
j
2750
as
~
~ 2250
PostWWII
and Korean War
Commodity boom of
the early 1970s
.:,,!
Wool boom of
the 1980s
~
Q)
1750
0
·.::
Cl.
0
0 1250
~
coCl)
a: 750
Cllil"ent..famling:is.tt\at. '"'"""'.. ,-...
250
1900
1920
1960
1940
1980
2000
Year
Figure 4. Real wool prices (c/kg greasy).
1150
Q)
c
c
950
0
~
~
Cl)
750
0
·.::
~Effect of 1914 drought
WWII and Post WWII
Commodity boom
of the early 1970s
I
farmers now can respond to high
price years by using selling
methods that were not available a
decade or more ago. Traditionally
farmers produced wheat and wool
which was delivered to selling
agents. Farmers' education, advice
and skill equipped them to be very
competent at production. But now
farmers need to be competent at
production and selling, or at least
they should employ advisers who
can inform them about when and
how to sell their wheat and wool
to either reduce the price
uncertainty they face or to
increase the likelihood of
receiving a high price.
Cl.
coCl) 550
a:
350
150
1900
1920
1940
1960
1980
2000
Year
Figure 5. Real wheat prices ($/tonne).
Accordingly most farmers will be
limited in their response to the
very high prices. Land use
decisions in previous seasons or
borrowing restrictions will limit a
farmer's ability to react to the
favourable price years. A rapid
switch in the farm's enterprise mix
is usually not possible. Besides,
investing in a large switch in
enterprise mix will prove unwise if
the weather-years during the price
spike are unfavourable or if the
brevity of the price spike
significantly reduces the return on
the capital purchased as part of
the enterprise switch. Hence, most
of the less risky yet profitable
decisions will be tactical ones
regarding stocking rates, crop
areas, fertiliser and herbicide
rates, selling options, casual
30
\\.A.JOURNALOFAGRICULTUR£
Vol.38 1997
Jabour, and the amount and timing
of sheep sales, purchases and
shearing.
Besides the decisions made during
the price spike, decisions made in
the years immediately subsequent
to the price spike also are
important. Sometimes the high
profits earned in years with very
favourable prices lull some
farmers into a false belief about
the profitability of agriculture.
Expensive purchases of land and
machinery can subsequently
prove to be unwise. For example,
following the commodity price
spike of the mid-1970s land and
machinery purchases were
common. Poor seasons, more
typical prices and very high
interest rates saw many farmers
Farmers now don't need only to
sell after harvest or shearing. They
can sell their production while it's
growing and sell it in many
different ways to capitalise on
price spikes. For example, in 1996
farmers fortunate enough to sow
early could have sold a portion of
their potential crop, immediately
after planting, for around $215 per
tonne. By contrast a pool return
equivalent price of the traditional
method of selling after harvest
seems likely to return to farmers a
price around $190 per tonne pool
return. So 1996 typifies the brevity
of a price spike and is an example
of how farmers well before harvest
could have capitalised on high
prices. This example, however,
does not imply that selling early is
always the best strategy for
capitalising on a price spike. It
illustrates how flexibility in the
time of selling can provide
opportunities not previously
available to capitalise on brief
periods of high prices.
For further lnformadon contact
R09I Kiagwell OD (08} 9368 3225.