(i) Marketing margins and profits
36. Prior to government intervention in the marketing of wool and mohair, there are both theoretical and empirical grounds for believing that private traders did not extract monopsony profits in wool and mohair purchases. Indeed, during a number of years, profits from these transactions were negative (Mokitimi, 1988). While marketing margins were sometimes high, so were storage, transportation and finance costs. In addition, traders faced high risks associated with a volatile market, particularly for mohair. Marketing margins are inadequate indicators of profit levels.
37. Since government intervention began, two factors have operated to enhance the profits of private traders dealing in wool and mohair.
a. The first is the reduced number of traders operating in this market, a factor which has enhanced their monopsonistic position. In addition, traders are rather highly concentrated: seven owned 72% of the trading stations handling wool and mohair in 1986. Although traders now face competition from government woolsheds, survey data suggest that these two outlets serve different kinds of clientele with different needs. Producers requiring traders' services now have to go longer distances to obtain them, if indeed they are available in their area at all. They are, thereby, placed in a less advantageous position vis-a-vis the trader. Although this does not affect the prices paid for a particular class of wool or mohair, it may have an impact on the classes into which fleeces are put. Within limits, traders still have discretion in classing fleeces and there have been numerous claims made, both from surveys and by observers, that traders often downgrade fleeces while classing.b. The second is the guaranteed commission or profit mark-up allowed by government. This is in addition to an allowance for all legitimate costs incurred in marketing.
38. Until recently, the net prices paid by LPMS and those paid by traders were almost identical. In 1982/83, producers received 65% of the gross wool price by selling to traders and 66% by selling through LPMS. In the same year, those selling to traders received 78% of the gross price for the higher-valued mohair. Those selling through LPMS received 81%. This should not be taken to imply that the two outlets were operating with equal efficiency, however, since many of the operating costs of the government outlet (shed maintenance, staff salaries, LPMS operating costs) are borne by the government and not charged against wool and mohair payments as they are for traders. If they were, net prices paid by LPMS would be in a much less favorable position.
39. Lately, this approximate price parity appears to have somewhat changed. Between 1983 and 1986, traders' allowable marketing charges increased a little over 100% for mohair and almost 60% for wool. During the same period the marketing charges deducted by LPMS actually declined by 12% for mohair and by 7% for wool. Several factors are relevant in this regard: (a) inflation in Lesotho has been running at the rate of between 12 and 16% per annum during this period. Thus, costs overall have been rising; (b) all of the costs incurred by the traders are the counterpart items of government subsidies to producers marketing through LPMS, or are costs borne directly by WGA members; thus they do not appear as deductions from payment cheques; (c) mohair prices increased by 56% between 1983 and 1985 and then declined by 26% in 1986; wool prices increased by 98% between 1983 and 1986; thus, as a percentage of price, margins increased somewhat for mohair but declined for wool.
(ii) Efficiency considerations
40. For several reasons the government woolshed/LPMS outlet is less efficient than the private outlet:
a. As previously noted, until recently the prices paid to producers using either the LPMS or the private channel were almost the same. Yet most of LPMS's costs were met by government subsidy. Some of the items in LPMS's operating budget have nothing to do with wool and mohair marketing - LPMS also organizes livestock markets and facilitates hides and skins sales, and some expenses are for regulatory or monitoring activities that would need to be undertaken in any case. Nonetheless, since wool and mohair marketing activities are LPMS's major responsibility, it would seem justifiable to allocate at least 50% of its recurrent budget to functions which are otherwise borne by the private sector. In addition, the cost of permanent woolshed staff and woolshed maintenance as well as depreciation are borne by the Livestock Department and donors. Summing expenditures from both sources and dividing by the amount of wool and mohair marketed through LPMS gives a rough estimate of the government subsidy paid per kilogram of fleece marketed through this outlet. The result is about 50 cents per kilogram, or 10 - 15% of the recent price for wool, and between 5 and 15% of that for mohair. Were these costs to be borne by producers, the price advantage of the LPMS outlet would be entirely eliminated and it is likely that much fewer producers would make use of this outlet.b. With the exception of temporary classers, who are hired for the shearing season, and shearers, who are self-employed, all government woolshed employees are full-time staff. Many of the government woolsheds are used only a few months a year, however, and even the busiest are used for only 8-9 months. During the remaining months, the woolshed as well as 2 or 3 permanent employees at each woolshed are practically kept idle. Not only do private traders usually have a longer shearing season, but also have greater flexibility to reassign their facilities and employees to other tasks during the idle months.
(iii) Equity considerations
41. Government woolsheds serve slightly more than a third of producers. Their flocks are much larger than average and much larger than those of producers selling elsewhere. As discussed in paragraph 40, producers marketing through LPMS have a number of marketing and overhead costs subsidized by the government and, in addition, have recently received higher net prices than those seling to private traders. Thus, the substantial government subsidies are going to the larger producers. This would seem to be undesirable from the standpoint of equity.
