An Equilibrium Displacement Model of the Australian Sheep and Wool Industries

Abstract

This report documents the specification of an equilibrium displacement model (EDM) of the Australian sheep and wool industries. The model is capable of estimating and comparing the potential benefits from R&D and generic promotion investments, and other policy changes, in the different sectors and markets of the Australian sheep and wool industries. Inclusive in the model are the multiple components of the Australian sheep and wool industries to account for cross-product interactions not considered in most previous studies. A high degree of industry disaggregation within the model enables estimation of the distribution of the potential benefits among the various industry sectors and across different regional environments. A number of hypothetical R&D and promotion investment scenarios were modelled as 1 per cent exogenous parallel shifts in the relevant market demand or supply curves, although only two scenarios are reported here. Changes in economic surplus were calculated as measures of welfare changes in each of the various industry sectors. In summary, the results from the simulations suggest sheep and wool producers’ gain more from on-farm research than off-farm research; export promotion than domestic promotion; and export promotion than most other R&D scenarios. Domestic consumers gain more from lamb R&D than from promotion, while they gain very little from promotion of wool in the export market. Although needing numerous prices and quantities as inputs, the model is not overtaxing on data requirements, as are econometric models. It can be updated with relative ease, as most of the necessary price and quantity data are readily available from government departments and industry organisations. The model is useful in both ex ante evaluations, as a means of assisting decisions of priority setting and resource allocations, and in ex post evaluations of actual investments or policy impacts. The inclusion of the multiple sheep and wool industry components enhances the accuracy of economic analysis, making the model a valuable tool to assist in industry policy and decision-making.