Economies of scale and locational pattern of wool villages in the South Island of New Zealand

Abstract

This study investigates wool marketing costs in the South Island of New Zealand. The objectives are (1) to determine the extent of economies of scale in wool villages and (2) to investigate a locational pattern of wool villages such that total assembly, processing and distribution costs are minimized. A wool village is defined as a single level store in which brokers combine in the receival, binning, classing, showing, dumping and despatch of wool.

Economic theory surrounding returns to scale, the causes of increasing and decreasing returns to scale and methods of recognising scale responses is discussed (Chapter III. A). The LRAC curve is used to recognise the effect of an increase in scale on per unit processing costs. Cost curve theory is reviewed and cost curve development methods suggested (Chapter III. B and C). Synthetic LRAC curves for wool processing within wool villages at each of the four South Island Wool Selling Centres (i.e. Christchurch, Timaru, Dunedin and Invercargill), given the existing industry's conventions and traditions, including locational differences, are developed (Chapter IV). Four LRAC curves are developed for each centre, one for each of the wool processing technologies considered, that is: traditional sale/wagon packing of containers, traditional sale/ground packing of containers, sale by sample/wagon packing of containers, sale by sample/ground packing of containers. Significant economies of scale are indicated within wool villages located at Christchurch and Timaru. At Dunedin and Invercargill economies of scale are displayed for throughputs up to 400,000 bales, thereafter constant returns to scale (approx.) are exhibited. Otago and Southland wools require less in store handling than do Canterbury wools, thus as throughputs rise at Invercargill (say), wool is drawn from Canterbury (requiring more handling). Processing costs rise nullifying any scale economies. The opposite is true for large throughputs at Christchurch or Timaru.

In Chapter V location theory is reviewed. The locational pattern of wool villages is determined using a budgetary approach. It is assumed that wool villages can only be located at existing centres. The optimal locational pattern for each processing technology is the two villages, 300,000 bale Christchurch and 400,000 bale Dunedin locational pattern. However the least expensive three village locational pattern and single village location, for each processing technology, is not significantly more expensive than the optimal locational pattern. This suggests in the event of wool villages being established, criteria other than least-cost (e.g. regional considerations) should be considered. These criteria are briefly discussed (Chapter VI).