Potential Returns to the Australian Sheep and Wool Industries from Effective R&D and Promotion Investments and their Sensitivities to Assumed Elasticity Values

Abstract

In recent years, Australian sheepmeat and wool producers have been exposed to more volatile and less secure market environments, placing greater pressure on producer-funded investments to be efficient and profitable. Knowledge about the size and distribution of the potential returns from alternative broad types of R&D and promotion investments permits strategic-level decisions about resource allocation, both within and across research programs. This is particularly important for the Australian sheepmeat and wool industries because they are characterised by strong cross-commodity relationships due to the joint product nature of the industries. Mounter et al. (2007) developed an equilibrium displacement model (EDM) of the Australian sheepmeat and wool industries to account for these relationships and any indirect benefits and costs arising from spill-over and feedback effects between the industries as a result of research-induced innovation or promotion. However, the values for many of the economic parameters in the EDM had to be specified subjectively due to the absence of relevant empirical estimates. Uncertainty about true parameter values raises concerns over the robustness of the results generated from the EDM. In this paper we use the EDM to estimate the potential annual returns and their distribution among the various industry sectors for nine hypothetical investment scenarios. Initially, the EDM is solved for the base set of parameter values. A formal stochastic sensitivity analysis is then undertaken to account for the uncertain parameter values in the model. The results were found to be relatively robust to different parameter values, indicating that the model as specified provides a credible framework to estimate and compare the potential impacts from new technologies, generic promotions and other industry changes in a consistent way.