CHAPTER IVTHE ECONOMIC ASPECT
Bearing in mind the industrial structure we have just outlined, it might be well for us to glance briefly at its financial scaffolding. From the banker’s point of view there are many features which are distinctive of the wool trade, and which exercise an important bearing upon the judgment of a credit risk.
Sheep Banks
Sheep Risks
To begin with the grower, we find here that in many instances the large raisers of sheep have built up their own banks. In Texas, for instance, there are a considerable number of banks whose chief business consists in financing the wool clips of their sections. On the other extreme we have the small grower of the East, who is frequently at the mercy of the local store-keeper. Where wool growing is practised on a large scale in this country the tendency is more and more to reduce the business to a scientifically standardized scale, in such a manner as is prevalent in Australia. The more this is done the more independent the grower becomes, and the easier it is for a bank to determine the strength of the individual risk. The sheep raiser has of course one primary asset, his flocks; and if he is compelled to borrow, the security behind his note rests upon his sheep. In making a loan to a sheep man a bank has to consider not only the market value of the animals, but the conditions under which they are being raised. Sheep are affected by droughts, for instance, and many flocks have been ravaged by predatory animals, or decimated by disease. Any one of these contingencies may at any moment destroy or depreciate the bank’s collateral, and for this reason borrowing of this sort is confined very largely to banks situated in sheep-growing sections which specialize in this form of loan.
Grower’s Cost
It would be of great interest to figure the average cost of production per pound of wool to the grower, but, with the varying conditions encountered in different parts of the country and with sundry breeds, an accurate estimate can hardly be arrived at. Even the cost of shearing is variously figured from ten to nearly thirty cents. Generally speaking, however, the grower needs very little financial assistance, because he is able to sell his entire clip for cash. The buyers representing merchants—or in a few cases, mills—are prepared to pay cash for their wool, and in some cases where they feel sure of a rising market, often go so far as to buy the wool on the sheep’s back before it is shorn. Provided the grower knows something about wool, and the existing demand, there is no reason why, from the proceeds of one clip, he should not be able to meet his costs up to the time of the next shearing.
The Merchant
The merchant is up against a very different proposition. As we have seen, he buys for cash, and not only sells on credit, but carries a large proportion of what he buys for several months, before he can dispose of it. There are so many kinds of wool merchants that it is almost impossible to make any general observations. One merchant, for example, may specialize entirely in domestic wools; in that case he would do all his buying in the spring months and would gradually dispose of his material, having first graded it, during the remainder of the year. Another house might do the bulk of its business in South American wools, which would mean a fall purchasing season. Still another would handle both domestic and South American, and a fourth might import from all parts of the world, so that buying and selling would be going on continuously and at the same time throughout the year. The credit requirements of the first two houses would be an easier demand upon the bank than those of the latter, but in all cases the judging of the risk involves certain primary considerations, each of which really necessitates the close study of the individual case.
Credit Risks
A wool merchant’s business is largely based on his estimate of the future. There are no “future” markets for wool as there are for cotton and silk, and the wool dealer cannot therefore protect himself by hedging. Were it not for the fact that he assumes a risk which neither the grower nor, in most cases, the manufacturer is able to take, he could not maintain his position as the middleman. The merchant’s buyer must, as we have seen, be able to judge the amount of shrinkage within a very small fraction, he must know the demand for each quality of wool so that he may be sure not to pay more than he can sell for, and, what is more, he must be able to forecast the future with a certain amount of accuracy in order to make his profit. Furthermore, the merchant must be constantly on his guard against doing more business than his capital warrants, while at the same time, unless he makes every dollar work, his business will in normal times fail to show him a profit.
Merchant Manufacturers
Some wool dealers have become considerably more than middlemen, and have gone quite extensively into the first stages of manufacture. This is particularly true of some of the large houses which of recent years have established top manufacturing departments, and which therefore sell a large proportion of their goods not as raw wool but as tops and noil.
Brokers
Although the dealers do the bulk of the commission work in consignment sales, there are a great number of brokers whose function is primarily the buying and selling for account of others. These houses usually operate with a limited capital, and are not extensive seekers of credit.
Mills
So far as the manufacturers, or mills of various sorts, are concerned, there is one striking difference about the paper of woolen and worsted mills as against cotton mill notes which appear in the open market; cotton mill paper, except in the case of the strongest mills, usually bears the endorsement of the commission house which sells the mill’s product, but this is not as a rule the case with woolen and worsted mill paper. The reason is that a large number of the wool manufacturing establishments sell direct to wholesalers and jobbers, and have no close affiliation with a selling-house.
Trade Terms
Trade terms vary a good deal. Raw wool is almost invariably sold for cash by the grower. Dealers make various terms to mills, the most usual being 1% ten days, sixty days net. The terms on which mills sell to jobbers also have a wide range; some sell thirty days net, some 10% thirty days, others 7% four months.
Sheep raising is, as we have seen, chiefly carried on on the borderlines of civilization. As civilized life encroaches upon the pasture lands the flocks are driven gradually further and further into hitherto uninhabited regions. The population of the world is steadily increasing, and the available grazing acres are constantly being reduced as the world becomes more thickly populated. Also, as the population increases, the demand for clothing and food increases, so that, on the face of it, it would seem that the production of wool would decrease while the demand grew constantly larger. In a measure this is true; but there are several factors which tend to arrest this Malthusian spectre. In the first place, there are still vast areas of desert land which can be reclaimed for grazing purposes. In the second place the growing of wool in most countries is as yet practiced on a very crude and consequently uneconomical scale. And, finally, the use of shoddy and wool regained from rags, has only begun to be developed. Nor is it true that sheep must necessarily be raised in uncultivated regions; England, with her closely settled soil, supports about three-fifths as many sheep as the United States, on an area of only 121,377 square miles, as against the 3,026,789 square miles in this country.
The world’s total output of wool in 1921 is estimated at three billion, three million pounds, as against two billion, eight hundred and ninety-four million pounds in 1918. The production of the 1921 crop was divided as follows: Europe 899 million pounds, Australia 718 million pounds, South America 592 million pounds, Asia 327 million pounds, North America 298 million pounds, Africa 169 million pounds.
The following table will show the amount of wool produced and imported in the United States between the years of 1897 and 1922:
U. S. Product
U. S. Imports