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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
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 is gratefully acknowledged.
Finally thanks are due to Mrs. Sue Nano for her efforts in typing the thesis, and to the autbor1s 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 Estimates 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
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 Connnission1s 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 Nevile 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
Simulated 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
114 114
115 116 116 117 118 120 120 121
121 122 123 125 126 129 129 132
134 135
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
ANALYSIS 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
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
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 Simulation 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
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 floor 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 to 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 WoolI
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!lission1 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 haveattempted 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 conditions 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, together 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 to 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.
