Coordinating Production And Disposal Of Commodity Stockpiles With Application To Australia'S Wool Industry

Following the dismantling of a price-support program, a central bureaucracy is left with a commodity stockpile to dispose. It happened with wheat and feed grains in the U.S. in 1986 and wool in Australia in 1991. It soon may happen in Europe with grains, manufactured dairy products and other commodities which have supported prices. Obvious policies include privatising the stockpile, disposing of the stockpile by a central bureaucracy and quarantining the stockpile from the market. Each policy imposes constraints on disposal based, perhaps, on judgments of political acceptability to producers and government. In this article, optimal rules for production and disposal are derived and solved and a new policy is proposed. Then the model is applied to the disposal of Australia's wool stockpile. Results show that centralised disposal will almost always be preferred to privatisation of the stockpile. Centralised disposal is also preferred to quarantining the stockpile if interest rates are high, but quarantining is preferred if interest rates are low. Centralised disposal and quarantining are not optimal, however. Optimal production and disposal combines the efficiency of privatisation with the market power of centralised disposal. To achieve this, the property rights to the stockpile can be redefined using payment-in-kind certificates and individual transferable entitlements. The payment-in-kind certificates assign ownership of the stockpile to individual producers who then make both production and disposal decisions. The individual transferable entitlements allow the industry to produce efficiently and extend market power from the central bureaucracy to producers. For the Australian wool stockpile, optimal production and disposal would benefit the industry by an estimated $2.7 billion.