oversight

Wool and Mohair Program: Need for Program Still in Question

Published by the Government Accountability Office on 1990-03-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                               United     States   General   Accounting   Office


.   .GiO                       Report to the Honorable
                               Charles E. Shumer, House of
                               Representatives


    March   1990
                               WOOLANDMOHAIR
                               PROGRAM
                               Need for Program Still
                               in Question




                                                                                       i

                                        ,y-Y-Q38                                       *i
                                                                                        $
                                                                                       ._
    GAO/RCED-90-51


                                                                            MI     I
                     n   I--
Resources, Community,   and
Economic Development    Division

B-203829

March 6,199O

The Honorable Charles E. Schumer
House of Representatives

Dear Mr. Schumer:

In response to your June 21, 1988, request, this is our report on the U.S. Department of
Agriculture’s wool and mohair program. It updates our 1982 report on the program and
provides matters for congressional consideration.

As arranged with your office, unless you publicly announce its contents earlier, we plan no
further distribution of this report until 30 days after the date of this letter. At that time, we
will send copies to appropriate House and Senate committees and subcommittees; interested
members of the Congress; the Secretary of Agriculture; and the Director, Office of
Management and Budget. Copies will also be made available to other interested parties upon
request.

This work was performed under the general direction of John W. Harrnan, Director, Food and
Agriculture Issues, (202) 2755138. Other major contributors are listed in appendix V in the
report.

Sincerely yours,




J. Dexter Peach
Assistant Comptroller General
Executive Summary


             In 1954. following a riecade of dramatic decline in the U.S. sheep indus-
Purpose      try, the National Wooi Act established a price support program for wool
             and mohair. From 1955 through 1988, payments made under this pro-
             gram totaled about $2 billion. In 1988 alone, producers received $41.4
             million in wool payments and $47.1 million in mohair payments.

             GAO,in 1982, reported that the wool portion of the program had a lim-
             ited effect on its objectives and was not an effective means to solve the
             sheep industry’s problems. Accordingly, GAOrecommended that the Con-
             gress consider whether federal financial assistance should continue to
             be provided to encourage wool production and/or assist the sheep indus-
             try. As a result of current budgetary concerns, Representative Charles
             E. Schumer asked GAOto update its 1982 report. Although in 1982 GAO
             did not address the mohair portion of the program, it is included in this
             report because mohair payments have become an increasingly signifi-
             cant part of the overall program costs.


             The National Wool Act of 1954, as amended, requires the Secretary of
Background   Agriculture to implement a program to encourage the continued domes-
             tic production of wool at prices fair to both producers and consumers in
             a manner which will assure a viable domestic industry. This objective is
             established as a measure of national security (wool was considered a
             strategic material in 1954), and to promote the general economic wel-
             fare, a positive balance of trade, and the efficient use of the nation’s
             resources. Although mohair is not cited in the wool program’s broad
             objectives, the act also includes mohair in its payment provisions.

             As an incentive to improve wool quality, the program was designed so
             that the higher the wool market price a producer receives, the higher
             the wool price support payment. The act limits program costs to an
             amount equal to a portion of the tariffs collected on certain imported
             woolen items.

             In 1982, GAOreported that wool payments provided under this program
             from 1955 through 1980 totaled $1.1 billion, yet annual wool production
             declined during the period from 283 million pounds to 106 million
             pounds. Information GAOobtained indicated that, because producers
             received about 75 percent of their income from lambs sold for meat, pro-
             duction decisions were based primarily on the profitability of the lamb
             market, not the wool market and the wool payments. GAOrecognized
             that the wool payments contributed to producers’ income and helped to
             slow the production decline. GAOestimated, however, that in 1980 alone



             Page 2                                 GAO/RCED!3@51   Wool and Mohair   Program
                       Executive   Summary




                       the additional output of wool attributable to the program cost the fed-
                       eral government $2.63 to $6.01 a pound, while the average market \,alue
                       of wool produced that year was only 88 cents a pound.

                       GAOfurther reported in 1982 that (1) the major reasons for establishing
                       the program were no longer as important as they once were because
                       wool was no longer classified as a strategic commodity for military and
                       emergency purposes, and (2) wool quality had not improved as a result
                       of the wool program.


                       The principal findings in GAO'S1982 report are still valid. Domestic wool
Results in Brief       production has continued to decline. In fact, from 1981 through 1988,
                       annual wool production declined to all-time lows and in 1988 was at 89
                       million pounds. While industry representatives and current studies con-
                       tend that the wool payments have (1) provided continued assurance of
                       income to producers, (2) had a stabilizing influence on the industry, and
                       (3) helped slow the decline in wool production, GAOestimated that in
                       1988 the additional output of wool attributable to the program cost the
                       federal government $3.04 a pound, while the average market price of
                       wool produced that year was only $1.38 a pound.

                       The wool program is justified, in part, on the basis that wool is a strate-
                       gic commodity for military and emergency purposes. However, as c.40
                       reported in 1982, wool is no longer classified as strategic.

                       Trends in wool quality remain largely undocumented. Industry and LT’.S.
                       mill representatives now believe, however, that some attributes of wool
                       quality have improved.

                       At the time of GAO'S1982 report, mohair payments represented only a
                       small portion of the overall program payments, but this situation has
                       changed. In 1988, for example, mohair payments represented over 53
                       percent of the total payments made. Despite this fact, specific legislative
                       objectives have not been established for mohair.



Principal Findings

Wool Production        From 1981 through 1988, about $665 million in wool payments were
                       made. During this period, domestic wool production continued its more
Continues to Decline   than 30-year decline, from 110 million pounds in 1981 to 89 million


                       Page 3                                   GAO/RCEDW51    Wool and Mohair   Program
                             ExecutiveSummary




                             pounds in 1988. To some degree. wool payments may have caused a
                             slower decline in production than would have occurred in the
                             absence of such payments. The most recent U.S. Department of Agri-
                             culture !CSDA) report available on this issue estimates that, on aver-
                             age during 1977 through 1983, the payments likely boosted wool
                             production by 18 percent. Using this figure, GAO estimated that, in
                              1988, the additional output of wool attributable to the program cost
                             the federal government more than twice the average wool market
                             price.


Wool Is Not a Strategic      Wool has not been listed as a strategic and critical material    for military
                             and emergency purposes since 1960. Although the military         purchases
Material                     about 8 percent of the annual domestic production of wool       for its peace-
                             time needs, future military use of wool could substantially     decrease as
                             new synthetic materials are used.


Wool Quali ty May Be         Industry and U.S. mill representatives believe that some attributes of
                             wool quality have improved during the 1980s. These representatives
Improving                    told GAO that wool contaminants had been reduced and the preparation
                             of wool for market in some areas had significantly improved. While GAO
                             was unable to determine to what extent the wool program influences
                             wool quality, the payments are an incentive to improvement because
                             they are directly tied to the market prices that individual producers
                             receive for the wool they sell.


No Specific Program          The act established no specific objectives for mohair. From 198 1
                             through 1988, mohair producers received $173 million in program pay-
Objectives
-_. .      Are Directed at   ments. In 1988 alone, mohair payments represented over 53 percent of
Mohair                       the total program payments made- $47.1 million of the total $88.5 mil-
                             lion paid. The act’s broad objectives, such as promoting the general eco-
                             nomic welfare, a positive balance of trade, and the efficient use of the
                             nation’s resources, apply to wool and not to mohair.


                             Consistent with its views in 1982, and in light of the nation’s current
Matters for                  budget constraints, the high per-pound subsidy cost, the broad objec-
Consideration by the         tives for the wool portion of the program, and the absence of objectives
Congress                     for the mohair portion, GAO continues to believe that the Congress
                             should consider the need for the wool and mohair program. If the Con-
                             gress decides to continue the program, GAO believes that the Congress



                             Page4                                    GAO/RCED9S51Wool   and MohairProgram
                   ExecutiveSummary




                   needs to consider, in light of current conditions, what it wants the pro-
                   gram’s objectives to be.


                         agreed with most of GAO'S findings and stated that the report was
Agency and Other   USDA
                   well prepared and adequately recognized the strengths and weaknesses
Comments           of the program. Similarly, an economics professor whose study on the
                   sheep and wool industry is cited in chapter 2 stated that the report pro-
                   vided a balanced, accurate appraisal of conditions in the sheep industry
                   and the effects of wool policy.

                   The American Sheep Industry Association disagreed with the overall
                   message of the report and stated that much of the report supports the
                   conclusion that the program has fulfilled the act’s objective of maintain-
                   ing a viable sheep and Angora goat industry. Similarly, the Mohair
                   Council of America stated that, while the report had been well
                   researched and compiled, it disagreed with the report message regarding
                   mohair. Both organizations asserted that, while the body of the report
                   recognized some of the more positive contributions of the program, the
                   report summary and conclusions lacked balance and were inconsistent
                   with some of the information contained in the report.

                   GAO  believes the report summary and conclusions are balanced and con-
                   sistent with the more detailed information presented in the body of the
                   report. In particular, GAO believes that the high per-pound subsidy cost
                   of the program, the broad wool objectives, the absence of specific
                   mohair objectives, the more than 30-year decline in wool production,
                   and the fact that wool is no longer a strategic material as it once was,
                   are the principal factors that the Congress needs to consider in its
                   upcoming debates on the program. GAO highlighted these factors in the
                   report summary and conclusions. Other factors of the program, as dis-
                   cussed in detail in the report, provide additional information for the
                   Congress to consider during its debates.

                   USDA'S,the American Sheep Industry Association’s, and the Mohair
                   Council of America’s specific comments and our evaluation are dis-
                   cussed in the report and included as appendixes.




                   Page 5                                  GAO/RCEDSO-51   Wool and Mohair   Program
Contents


Executive Summary                                                                                    2
Chapter 1                                                                                            8
Introduction           National Wool Act Addressed Concerns About the
                            Declining Wool Industry
                                                                                                     9

                       In 1982 We Reported That wool Program Objectives Were                        11
                            Not Being Met
                       Objectives, Scope, and Methodology                                           12

Chapter 2                                                                                          1.i
Key-Aspects of the     Program’s Impact on Encouraging Wool Production
                       The Strategic Status of Wool and Its Importance to the
                                                                                                   1.5
                                                                                                   20
Wool Program               U.S. Military
                       Program’s Impact on Wool Quality                                            22
                       Program’s Impact on Maintaining Normal Marketing                            26
                           Practices by Providing Unshorn Lamb Payments
                       Program’s Impact on Other Objectives of the Act                              27
                       Agency Comments and Our Evaluation                                           29
                       Industry Comments and Our Evaluation                                         29

Chapter 3                                                                                          32
Other Aspects of the   The Relationship of Wool Import Tariffs to the Wool
                           Program
                                                                                                   32
Wool Program           Annual Operating Costs of the Wool Program                                   34
                       Impact on Small Payment Recipients If They No Longer                         35
                           Receive Wool Payments
                       Agency Comments and Our Evaluation                                           37
                       Industry Comments and Our Evaluation                                         37

Chapter 4                                                                                           38
Basis for Mohair       History of the Mohair Program                                                38
                       The National Wool Act of 1954 Did Not Specify Mohair                         39
Payments Has Not            Objectives
Been Clearly           The Broad Wool Objectives Do Not Apply to Mohair                             40
                       Industry Comments and Our Evaluation                                         41
Established




                       Page 6                                 GAO/RCED9@51   Wool and Mohair   Program
                       Contents




Chapter 5                                                                                             43
Conclusions and        Conclusions
                       Matters for Consideration by the Congress
                                                                                                      43
                                                                                                      43
Matters for            Agency and Other Comments and Our Evaluation                                   44
Consideration by the
Congress
Appendixes             Appendix I: Comments From the US. Department of                                46
                           Agriculture
                       Appendix II: Comments From Glen Whipple, University of                         48
                           Wyoming
                       Appendix III: Comments From the American Sheep                                  49
                           Industry Association
                       Appendix IV: Comments From the Mohair Council of                                57
                           America
                       Appendix V: Major Contributors to This Report                                   59

Tables                 Table 2.1: United States Sheep Production Cost and                              18
                           Returns
                       Table 2.2: Military Wool Statistics, Fiscal Year 1989                           21
                       Table 3.1: Annual Operating Costs Related to the National                       34
                           Wool Act for Fiscal Years 1981-1987
                       Table 3.2: Wool Payments Made During Marketing Year                             35
                            1986
                       Table 4.1: Mohair Production and Payment Statistics,                            39
                            1981-1988




                       Abbreviations

                       ASCS       Agricultural Stabilization and Conservation Service
                       ASIA       American Sheep Industry Association
                       MPC        American Sheep Producers Council
                       ccc        Commodity Credit Corporation
                       DPSC       Defense Personnel Support Center
                       ERS        Economic Research Service
                       GAO        General Accounting Office
                       NWGA       National Wool Growers Association
                       USDA       U.S. Department of Agriculture


                       Page 7                                  GAO/‘RCED-B&51   Wool and Mohair   Program
Chapter 1

Introduction


               Sheep have been an integral part of American agriculture since colonial
               times, providing two useful products-meat      for food and wool for use in
               clothing and other commodities. Before 1900, sheep were raised prima-
               rily to produce wool. Since that time, wool has provided a smaller por-
               tion of the overall income to the sheep industry, although producers,
               particularly those in the western states where about 80 percent of the
               sheep are raised, continue to consider both wool and lamb in their pro-
               duction decisions.

               By 1942, the United States had become third in the world in wool pro-
               duction, with a record 56 million sheep producing 495 million pounds of
               wool. During the subsequent decade, the sheep industry suffered an
               unprecedented decline, and by 1953, the number of domestic sheep had
               been reduced to about 32 million head, producing 296 million pounds of
               wool. That level was sufficient to supply only about one-third of the
               normal U.S. peacetime requirements in 1953 and one-half of the rate of
               consumption for U.S. military use alone during World War II. As a con-
               sequence of the declining domestic wool supply, U.S. mills were becom-
               ing more dependent on foreign wool to make up the volume of wool
               needed to support their production.

               Concerns about the effects of the declining sheep industry led President
               Eisenhower, in July 1953, to request the Secretary of Agriculture to
               study the factors contributing to the decline in the number of sheep and
               in wool production and make “suggestions which will promote the devel-
               opment of a sound and prosperous domestic wool industry and at the
               same time permit an expanding world trade.” The Secretary’s study
               Achieving A Sound Domestic Wool Industry, published in December
               1953, determined that a number of factors had combined to contribute
               to the sheep industry’s decline. The most significant of these factors
               included (1) a scarcity of competent labor in an industry that is excep-
               tionally dependent upon specialized labor; (2) relatively low returns,
               high costs, and high risks associated with sheep production, as com-
               pared with cattle production; (3) the inability to increase the efficiency
               of sheep production at a rate comparable to other agricultural enter-
               prises; (4) future uncertainties arising from adverse price-cost relation-
               ships, the threat of wool imports and tariff reductions, and the
               possibility of reductions in federal grazing allotments; (5) sheep losses to
               predatory animals and dogs at a time when competent help for protec-
               tion against these hazards had become scarce and expensive; and (6)
               drought, especially in sheep producing regions of the Southwest.




               Page 8                                  GAO/RCED-9061   Wool and Mohair   Pro@am
                            Chapter 1
                            Introduction




                            In conjunction with his 1953 study. the Secretary drafted and proposed
                            a National Wool Act that would provide assistance to sheep producers to
                            enable them to compete with imported wool. The President accepted the
                            Secretary’s proposed legislation and forwarded it to the Congress for
                            their consideration.


                            On August 28, 1954, the National Wool Act was enacted to address a
National Wool Act           broad scope of congressional concerns about the conditions and conse-
Addressed Concerns          quences of the decline in the sheep and wool industry. Those concerns
                            included the following:
About the Declining
Wool Industry
                      l     Wool was an essential component used in military uniforms and other
                            military items and, as such, was listed as a strategic material under pro-
                            visions of the Strategic and Critical Materials Stock Piling Act. Addition-
                            ally, because the gap between domestic production and consumption of
                            wool was being filled by imports transported over long distances, pre-
                            dominately from Australia, New Zealand, and South Africa, proponents
                            of the act believed that the situation posed a risk to our ability to supply
                            a surge in US. military requirements for wool.
                      l     The sheep industry, with its production and related jobs, was an impor-
                            tant component affecting the general welfare and the rural economies in
                            many areas where sheep were raised.
                      l     The tariff on imported wool and woolen products was acknowledged to
                            be too low to enable domestic wool to compete with cheaper foreign
                            wool. However, increasing the tariff level could affect trade with the
                            friendly countries from which U.S. mills imported wool and would be
                            counter to our policy to expand foreign trade. Furthermore, such action
                            would raise the price of wool in the United States and could affect its
                            competitive position with other fibers.
                      l     Sheep production was often carried out on harsh ranges where the char-
                            acter of the land, arid conditions, and available forage were less suitable
                            for other agricultural enterprises.
                      l     As a matter of national policy, the Congress believed that the United
                            States should supply a substantially larger portion of its wool require-
                            ments from domestic sheep production.
                          . Sheep production on small U.S. farms, and by producers such as Indians
                            whose income is derived from small numbers of sheep, represent an
                            important part of the domestic sheep and wool industry.




                            Page 9                                   GAO/RCED4tMl   Wool and Mohair   F’roPam
                        Chapter 1
                        tntroduction




Objective and           The National Wool Act’s objective is to encourage the continued domes-
Administration of the   tic production of wool at prices fair to both producers and consumers in
                        a manner which will assure a viable domestic wool industry in the
National Wool Act       future.’ The act further specifies that this objective is established as a
                        measure of national security’ and to promote the general economic wel-
                        fare, a positive balance of trade, and the efficient use of the nation’s
                        resources.

                        The National Wool Act authorizes the Secretary of Agriculture to sup-
                        port the price of wool through loans, purchases, payments, or other
                        operations.” Since the act became effective on April 1, 1955, the Secre-
                        taries have opted for a payment program. The program has been
                        designed so that the higher the wool market price a producer receives,
                        the higher the wool price support payment. Each year, the U.S. Depart-
                        ment of Agriculture (USDA) calculates a single payment rate for deter-
                        mining wool payments. This rate is the percentage required to bring the
                        national average price for domestic wool sold up to a predetermined
                        price support level. A wool payment to each producer is then calculated
                        by applying this rate to the producer’s net proceeds from wool sold dur-
                        ing the preceding calendar (marketing) year. In 1988, 29 percent was
                        calculated as the rate necessary to raise that year’s national average
                        price of $1.38 to a wool price support level of $1.78. Thus, producers
                        received a wool payment of 29 cents for each $1.00 of wool they mar-
                        keted. According to USDA, using this percentage method, rather than
                        making a uniform flat payment per pound of wool sold, encourages pro-
                        ducers to obtain higher market prices by improving the quality and mar-
                        keting of their wool.

                        The wool payment program is administered by USDA’S Agricultural Stabi-
                        lization and Conservation Service (ASCS),with funds appropriated
                        through the Commodity Credit Corporation (ccc). The program provides
                        payments for both shorn wool and unshorn lambs. Shorn wool is wool
                        that is actually sheared from sheep and lambs. Payments for unshorn
                        lambs are made to maintain the normal practice of marketing lambs


                        ‘The policy statement in the National Wool Act of 1954 was amended in 1977, wherein an annual
                        production goal of 300 million pounds of shorn wool was deleted, and other objectives, such as a
                        positive balance of trade and the efficient use of the nation’s resources, were added.

                        ‘At the time the act was passed, wool was listed under the Strategic and Critical Materials Stock
                        Piling Act. As such, wool was stockpiled by the federal government for military and civilian needs
                        during national emergencies.

                        :jThe act also includes mohair (which is the long silky hair of the Angora goat) in its program provl-
                        sions. That part of the program is discussed in detail in ch. 4 of this report.



                        Page 10                                                 GAO/RCED9@51        Wool and Mohair    Program
                      Chapter 1
                      Introduction




                      unshorn and are computed to give producers the same net returns they
                      would have received if they had sheared the lambs and obtained shorn
                      wool payments. Payments for wool marketed during one calendar year
                      are made after ,March 31 of the following year.

                      Government expenditures incurred for the wool program include pro-
                      ducer payments and operating costs (administrative and interest
                      expenses). From 1955 through 1988, wool payments totaled about 3 1.8
                      billion. For the period of 1981 through 1988, which is the period covered
                      in this report, about $665 million in payments were made. Those pay-
                      ments varied from a high of $116.9 million in 1983 to a low of $41.4
                      million in 1988. The program’s average operating costs in recent years
                      have amounted to about $6 million a year, of which one-third represents
                      .;\scsadministrative expenses and two-thirds represents interest
                      expenses incurred by CCC for borrowing funds from the U.S. Treasury.

                      The Kational Wool Act places no limit on the payment amount that each
                       wool producer may receive, although the Secretary is authorized not to
                       make individual payments if he determines the amounts are too small to
                      justify the administrative costs. However, the act does limit the total
                       amount that can be appropriated to the program during any fiscal year
                      to 70 percent of the duties collected on certain imported wool and
                       woolen manufactures during the calendar year preceding the beginning
                      of the fiscal year in which the expenditures were made.


                      In 1982, we reported that the wool program (1) had a limited effect on
In 1982 We Reported   encouraging wool production and improving wool quality and (2) was
That Wool Program     not designed as an income supplement program; therefore, it was not an
Objectives Were Not   effective means to solve the sheep industry’s problems.-’ U.S. wool pro-
                      duction had declined from 283 million pounds in 1955 to 106 million
Being Met             pounds in 1980. We also noted that, although no statistics on wool qual-
                      ity existed, USDA and industry sources generally believed that wool qual-
                      ity had not improved.

                      We concluded that the major reasons for establishing the program were
                      no longer as important as they once were because wool was no longer
                      classified as a strategic commodity for military and emergency pur-
                      poses, and its importance for defense mobilization requirements as well

                      ‘Our 1982 report, Congressional Decision Needed On Necessity Of Federal Wool Program, (GAO’
                      CED-82-86, Aug. 2. 1982). did not address the mohair portion of the program because mohax pay-
                      ments had not been made since 1972. Furthermore, mohair payments had been made in only 8 of 17
                      years preceding 19i2.



                      Page 11                                            GAO/RCED9@51      Wool and Mohair   Program
                            Chapter 1
                            Introduction




                            as to the C.S. textile industry had declined. Furthermore, we concluded
                            that program payments made to noncommercial producers; and for
                            unshorn lambs were not effectively accomplishing their intended
                            objectives.

                            On the basis of our 1982 findings, we recommended that the Congt-ess
                            consider whether federal financial assistance should (1) continue to be
                            provided to encourage wool production and/or (2) be provided to gener-
                            ally assist the sheep industry. We also recommended, if the program was
                            retained, that the Congress eliminate payments to noncommercial pro-
                            ducers and payments for unshorn lambs. The Congress took no action to
                            address our recommendations.


                            As a result of budgetary concerns facing the Congress and the increasing
Objectives, Scope,and       costs incurred in the wool program in recent years, Representative
Methodology                 Charles E. Schumer, on June 21, 1988, requested that we update our
                            1982 report on the program and determine what, if any, circumstances
                            had changed. Specifically, as agreed with Representative Schumer’s
                            office, we addressed the following questions:

                        . Are our earlier conclusions that the program was not meeting its man-
                          dated objectives still valid? If so, are there any other justifications for
                          maintaining the program?
                        . If the wool program payments were eliminated, what would be the
                          impact on the wool import tariffs? Are the tariffs only justified to
                          finance this program? Are there any trade agreements that would pro-
                          hibit the collection of the tariff if the program were terminated?
                        l Is the statement made in our previous report still applicable-that       in
                           1980, “over 60 percent of the program recipients were paid less than
                          $100 and the balance of the payments averaged less than $1 ,OOO?”How
                          much does it cost to administer the program payments, and what would
                          be the impact on recipients if they no longer received those payments of
                          less than $100 a year?
                        . What is our opinion on the need to continue this program‘?

                            These questions focus on aspects of the program we addressed in 1982.
                            but since that time a related portion of the program-the mohair pay-
                            ments- has received increased funding. In 1988, for example, mohair

                             ‘According  to USDA, a noncommercial producer maintains less than 50 sheep. We reported that. In
                             1980. this producer received wool payments of 0 100 or less and raised sheep for reasons other than
                             income, such as for a hobby.



                             Page 12                                               GAO/RCED!I@51 Wool and Mohair Program
Chapter 1
Introduction




producers received $47.1 million which represented over 53 percent of
the total program payments made that year. Therefore. although we
were not initially asked to address mohair payments, we agreed with
Representative Schumer’s office to include them in our overall program
analysis.

As part of our review, we researched pertinent literature and documen-
tation on the domestic wool and mohair industry, including legislative
history files and USDA, sheep industry, and university studies and eco-
nomic reports. Because of the limited data available on the impact of the
wool payment program on the industry, we had to obtain much of our
detailed information from industry representatives and producers who
were most knowledgeable of the issues. We did not verify the accuracy
of the information obtained from any of these sources. We did, however,
obtain comments on a draft of this report from organizations represent-
ing wool and mohair producers, and from an economics professor at the
University of Wyoming whose study on the sheep and wool industry is
cited in chapter 2.

To update our earlier work on the key aspects of the program and the
matter of small program payments made to noncommercial producers,
we discussed these matters with (1) USDA officials in Washington, D.C.,
and at the Texas ASCS state office in College Station, Texas (the nation’s
leading sheep-producing state) and (2) sheep and goat industry repre-
sentatives at the American Sheep Producers Council (*PC) and the
Kational Wool Growers Association (NWCA),” the Mohair Council of
America, the Texas Sheep and Goat Raisers Association, and the
National Lamb Feeders Association. These organizations represent the
interests of most of the domestic wool or mohair producers.

We discussed the opportunities and limitations facing domestic sheep
producers’ efforts to increase production and improve wool quality and
marketing with sheep and wool specialists at the Texas Agricultural
Experiment Station, San Angelo, Texas; Texas Agricultural and Mechan-
ical University, College Station, Texas; the University of Wyoming, Lar-
amie, Wyoming; and the Yocom-McCall Testing Laboratories, Inc. (the
only commercial wool testing laboratory in the United States), Denver,
Colorado.



“In January 1989, producer members voted to consolidate the ASPC and the SWGX. The new orgam-
zation is the American Sheep Industry Association, located in Denver, Colorado.



Page 13                                           GAO/RCED9@51     Wool and Mohair   Program
Chapter I
Introduction




We also discussed the matter of wool production and quality with offi-
cials from three wool marketing organizations: the Utah Wool Marketing
Association, Salt Lake City, Utah; the Sonora Wool and Mohair Com-
pany, Sonora, Texas; and the Eden Wool and Mohair Warehouse, Eden,
Texas; and from two wool processing mills: the Columbia Wool Scouring
Mills, a subsidiary of Pendleton Woolen Mills, Portland, Oregon; and
Burlington Menswear, a division of Burlington Industries, Inc., Clarks-
ville, Virginia. We selected the Utah association because it handles and
markets wool produced by about 700 western-state sheep producers,
while we selected the Texas companies because they also support a
large number of producers and prepare and market both wool and
mohair. We contacted the mills because they are major players in the
U.S. wool processing industry-purchasing      and processing both domes-
tic and imported wool.

We attended the 1989 American Sheep Industry Convention in Las
Vegas, Nevada, where we discussed sheep production and the role of the
wool program payments with (1) individual producers representing
state wool industry organizations from Texas, New Mexico, Colorado,
Wyoming, Montana, South Dakota, Illinois, and Indiana; (2) representa-
tives of the Navajo wool and mohair marketing industry; and (3) various
representatives from US. wool processing companies.

We discussed the military’s present and future need for woolen products
with Defense Logistics Agency officials in Washington, D.C., and
addressed the relationship specified in the National Wool Act bt$ween
import tariffs and the wool program with USDAand Internationa .l Trade
Commission officials.

We conducted our work between August 1988 and August 1989 in accor-
dance with generally accepted government auditing standards.




 Page 14                               GAO/RCEIMO-51
                                                   Wool   and Mohair   Program
Chapter 2

Key Aspects of the Wool Program


                          In our 1982 report, we discussed four key aspects of the wool pro-
                          gram-the effect of the payments on domestic wool production wool’s
                          strategic and military importance, and the program’s impact on improv-
                          ing wool quality and maintaining normal marketing practices by provid-
                          ing unshorn lamb payments. In response to Representative Schumer’s
                          request, we reexamined these four key aspects of the wool program, as
                          well as several other aspects that are important in weighing the overall
                          effect of the program on the sheep industry. These other aspects, which
                          are broad objectives of the act, relate to the program’s contribution
                          towards promoting (1) the general economic welfare, (2) a positive bal-
                          ance of trade, and (3) the efficient use of the nation’s resources.

                          In summary, we found that since our 1982 report:

                      l Wool production has continued to decline. Some recent studies indicate
                        that the wool program has helped to slow this decline and stabilize
                        sheep producers’ income.
                      l As we previously reported, wool is no longer considered a strategic and
                        critical material and, while current defense needs are substantial, future
                        requirements may decrease because of the availability of new materials.
                      . It appears that some aspects of wool quality have improved since 1980,
                        although there is little documentation on trends in the attributes or
                        quality of U.S. wool.
                      . As in our earlier findings, some industry representatives believe that the
                        unshorn lamb payments are not a factor in lamb shearing decisions,
                        while others believe that those payments are a factor. If, in fact, produc-
                        ers were to receive higher prices for unshorn lambs than for shorn
                        lambs, it is unclear how the unshorn lamb payments would affect lamb
                        shearing decisions.
                      l Although the program has done some positive things for the industry, it
                        is unclear how the program could meet its broad, less measurable objec-
                        tives of promoting a positive balance of trade, the general economic wel-
                        fare, and the efficient use of the nation’s resources.


                          A major objective of the National Wool Act is to support U.S. wool prices
Program’s Impact on       in order to encourage the continued domestic production of wool. Our
Encouraging Wool          1982 report and our update efforts show that, overall, wool production
Production                has declined substantially since the wool payment program began in
                           1955. To some degree, however, the program may have caused a slower
                          decline than would have occurred in the absence of the program. and it
                          has helped to stabilize producers’ income. The following section dis-
                          cusses the wool production aspect of the program in detail.


                          Page 15                                GAO/RCED-9061   Wool and Mohair   Program
                            Chapter 2
                            Key Aspects of the Wool Program




ou.r 1982 Report Findings   In 1982 we reported that domestic wool production had declined from
                            283 million pounds in 1955 to 106 million pounds in 1980. Although the
on Wool Production          wool program had not stopped that decline, we stated that the program
                            payments, which at that time amounted to about $1.1 billion, had helped
                            slow the decline by contributing to producers’ income, thereby helping
                            some producers to continue to stay in business. On the basis of an eco-
                            nomic analysis we performed, we estimated that the payments’ average
                            annual effect on wool production between 1956 and 1979 was to
                            increase output by 10.5 million to 24.2 million pounds (about 6 to 13
                            percent) above the level it would have been in the program’s absence.

                            For 1980, we estimated that the wool payments increased output
                            between 7 million and 16 million pounds. In effect, the additional output
                            in 1980 cost the federal government $2.63 to $6.01 a pound,’ while the
                            average market value of wool produced that year was only 88 cents a
                            pound.

                            Even though the program payments had helped slow the decline in wool
                            production, information we obtained during our earlier review indicated
                            that producers received about 75 percent of their sheep income from
                            lambs sold for meat. As a result, their production decisions were based
                            primarily on the profitability of the lamb market, not the wool market
                            and the wool payments. Based on that information, we concluded that
                            the wool program had not been effective in encouraging wool
                            production.


Our Current Findings on     Although domestic wool production, overall, has continued to decline
                            since 1980, the rate of decline has been somewhat slower than in prior
Wool Production             years and, according to USDA,the wool industry appears to be stabilizing.
                            Recent studies we reviewed and industry representatives contend that
                            wool program payments provide income stability to sheep producers
                            and also appear to be important to wool production decisions. In addi-
                            tion, some industry representatives stated that the program payment
                            level has not been allowed to increase as much as the act intended; thus,
                            the program’s potential to further influence production has been
                            reduced.




                            ‘We calculated this cost by obtainmg the wool program expenditures for 1980 and dividing them by
                            the increased output attributable to the wool payments to arrive at a federal government cost per
                            pound.



                            Page 16                                             GAO/RCED90-51      Wool and Mohair    Program
                                  Chapter 2
                                  Key Aspects of the Wool Program




                                  In 1981. tvool production increased to 1 10 million pounds, which was a 1
                                  million pound increase over the previous year. Wool production sllbse-
                                  quently declined each year from 1982 through 1987, when it reached an
                                  all-time low of about 85 million pounds. In 1988, wool production again
                                  increased 4 million pounds over the previous year, to 89 million pounds.
                                  A March 1989 IXDA report on the status of the U.S. sheep industry con-
                                  cludes that the industry’s production is showing signs of stabilizing and
                                  may continue near the current level for several years.

Recent Studies Indicate Program   Three recent studies that address the influence of the wool program on
Payments Affect Wool              the domestic sheep industry suggest that the program payments may
Production                        have a greater impact on production than was found in the past. First, a
                                  1989 study conducted by two University of Wyoming economics profes-
                                  sors concludes that (1) changes in the wool program could have serious
                                  implications for the domestic sheep industry and (2) reduction in the
                                  payments could substantially reduce the domestic output of both wool
                                  and lamb.’ The study states that wool price (which includes the wool
                                  program payments) is an important decision factor for sheep producers
                                  and, in the intermediate run, it has a positive effect on the lamb and
                                  sheep supply.

                                  Second, in 1988, the Virginia Polytechnic Institute and State C’niversity
                                  in Blacksburg, Virginia, statistically sampled and surveyed 1,000 domes-
                                  tic sheep producers regarding sheep and wool production. Over 69 per-
                                  cent of the survey respondents indicated that the wool program
                                  payments were a major factor in their decisions to continue sheep pro-
                                  duction. Furthermore, the respondents stated that the payments stabi-
                                  lized their income and provided a buffer against operating losses.

                                  Third, a September 1984 USDAEconomic Research Service (ERS) report,
                                  Wool and Mohair - Background for 1985 Farm Legislation, stated that
                                  the wool payments, on average during 1977 through 1983, raised sheep
                                  producers’ receipts per pound of wool sold by 62 percent. This was
                                  based on the fact that the average wool program payment made during
                                  that period was about 48 cents a pound, compared with an average mar-
                                  ket price of wool of about 78 cents a pound. The report also stated that
                                  the payments had likely boosted wool production by 18 percent, i.e.,
                                  during the 1977-83 period, production would have been 90 million
                                  pounds a year without the program and 106 million pounds a year with
                                  the program. In effect, this additional output of 16 million pounds a year

                                  ‘Whipple, Glen D. and Dale .J. Menkhaus. “Supply Response Lnthe c’.S. Sheep [ndustry.” Amerw,m
                                  .Joumal of .4gricultural Economics. Feb. 1989.



                                  Page 17                                             GAO/RCED-90-51    Wool and Mohair   Prtppm
                                        Chapter 2
                                        Key .4spects of the Wool Program




                                        cost the federal government $3.19 a pound, while the average market
                                        price of wool produced during that period was about 78 cents a pound.
                                        Assuming that this 18-percent impact on wool production continued. the
                                        wool payments in 1988 would have resulted in an additional In.6 million
                                        pounds of wool production at a cost to the federal government of %.04 a
                                        pound. The average market price of wool in 1988 was only S 1.38 a
                                        pound.

Industry Representatives         View   According to the American Sheep Industry Association (.UIA) represent-
Program Payments as a                   atives and other sheep specialists we contacted, the wool program pay-
Stabilizing Influence                   ments have supported a higher level of sheep and wool production than
                                        would have occurred without the wool program. Furthermore, they
                                        believe that the assurance of wool income at the wool price support level
                                        provides a stabilizing influence on the sheep industry which benefits
                                        financial planning for the business. These representatives and special-
                                        ists also indicate that the wool payments function as a positive factor in
                                        many financial institutions’ evaluation of loan applications for sheep
                                        production.

                                        In addition, these contacts said that in some years wool program pay-
                                        ments enabled some producers to realize a positive rather than a nega-
                                        tive cash flow from their sheep enterprises and to continue sheep and
                                        wool production. As shown in Table 2.1, USDA data on average sheep
                                        production cost and income indicates that during 3 of the 7 years from
                                        1981 through 1987, production costs exceeded the revenue from lamb
                                        and wool sales by about $1.00 to $9.00 per ewe. In 2 of those 3 years,
                                        the wool payments enabled the sheep enterprise to realize a positive
                                        rather than a negative cash flow. In the remaining year, the wool pay-
                                        ments substantially reduced the negative cash flow.

Table 2.1: United States Sheep
Production Cost and Returns             Per ewe                            1981       1982     1983     1984     1985      1986       1987
                                        Cash recetpts from sale of
                                          lambs, ewes, and wool          $40.21     $39 42    $37 58   $46 96   $52 96   $52 94     $60 78
                                        Cash expenses for feed,
                                          labor, etc.a                     41.29     48 39     43.03    40 90    39 27    43 27      14 66
                                        Income prior to wool
                                           payments                        -1.08     -8.97    -5 45      6 06    13.69      9 67      16 12
                                        Total wool payments’                 5 49      7 78     9.31    11 28    1320      14 ia      12 27
                                        Income after wool
                                           payments                        $4.41    $-1.19     $3.86   $17 34   $26 89   $23 85     $28 39
                                        ‘Cash expenses do not Include payments for own labor and own land

                                        bWool payments are based on the previous year’s marketing.
                                        Source USDA Economic Research Service




                                        Page 18                                               GAO/RCED!lO-51    Wool and Mohair    Program
                                   Chapter 2
                                   Key Aspects of the Wool Program




Industry Representatives Believe   The sale of lambs provides the larger portion of annual income to the
Program Payments Influence          average sheep enterprise. However, industry representatives we con-
Wool Production Decisions          tacted during this review believe that income from the sale of wool and
                                    from the wool program payments are also important to the success of
                                   the sheep enterprise and are factors considered in wool production deci-
                                   sions. While the quantity and quality of wool produced by the sheep
                                   flock may vary somewhat each year because of such factors as climate
                                   and range conditions, the wool crop is relatively predictable because it is
                                   based on the number of sheep in the flock. The lamb crop, on the other
                                   hand, is less predictable because the flocks’ level of reproduction of
                                   lambs can be lowered by environmental factors, such as storms, drought
                                   conditions, and health problems. For example, according to a sheep spe-
                                   cialist at the Texas Agricultural Experiment Station, among the Texas
                                   range flocks, about 77 lambs on average are raised annually for each
                                    100 ewes of breeding age. Thus, at least 23 percent of those ewes do not
                                   produce lambs that survive through marketing, so the income derived
                                   from wool sales and the wool program payments would likely become
                                   the primary source of revenue for that portion of the flock.

                                   Furthermore, in those areas where predator loss is a problem, wool pro-
                                   duction and its income take on added significance to production deci-
                                   sions. The annual income from lamb sales (which provides many sheep
                                   enterprises their primary source of income) fluctuates because of the
                                   loss of lambs to predators. According to ASPCand NWGA representatives,
                                   this loss of lambs is a major problem for the sheep industry, especially
                                   among the Texas and western range flocks. The KWGA provided us data
                                   showing that losses to predators cost domestic sheep producers an esti-
                                   mated $69 million in 1985, $72 million in 1986, and $83 million in 1987.

Industry Representatives State     According to ASPC and NWGA representatives, wool support prices have
That Program Payments Are          not been allowed to increase as initially intended by the National Wool
Lower Than the Act Intended        Act of 1954 because they have not been adjusted annually in conjunc-
                                   tion with increases in the wool parity index.” For several years since
                                   1954, legislative amendments have resulted in support prices being
                                   below the levels that USDA initially considered were necessary to
                                   encourage wool production. ASPCand NWGA representatives believe that
                                   the program’s impact on encouraging production may have been limited
                                   because of these lower support prices.



                                   ‘A parity index is the index of prices paid by farmers for commodities and services, mludmg inter-
                                   est, taxes. and farm wages. The National Wool Act, as amended, established a support price formula
                                   designed to use certain average parity indexes in its calculations.



                                   Page 19                                              GAO/RcED~Sl        Wool and Mohair    Program
                             Chapter 2
                             Key Aspects of the Wool Program




                             The 1954 act directed the Secretary to support the price of wool at not
                             less than 60 percent nor more than 110 percent of wool parity as the
                             Secretary determines necessary to encourage wool production consistent
                             with the act’s declared policy. LZDA acknowledged in legislative hearings
                             on the proposed act that, depending on the strength of competing enter-
                             prises such as cattle production, the support price needed to encourage
                             increased wool production should exceed 90 percent of wool parity and
                             could exceed 100 percent.

                             -4n ASCSspecialist provided us data showing that the program’s support
                             price was set at a level that represented from 90 to 106 percent of the
                             applicable wool parity price during the initial four program years only
                             (1955-1958). From 1959 through 1963, the support prices were at 80 to
                             90 percent of wool parity; and from 1964 through 1987, the support
                             prices were at levels below 80 percent of wool parity. Of particular note
                             is the fact that in 1975 and 1976, legislatively-set support prices fell
                             below the minimum 60 percent of wool parity level established in the
                             1354 act.


                             The National Wool Act states that wool is an essential and strategic com-
The Strategic Status of      modity. Furthermore, it justifies the wool payment program, in part, on
Wool and Its                 the basis that wool production is encouraged as a measure of national
Importance to the U.S.       security. In our 1982 report, and again in this review, we found that
                             wool is no longer listed as a strategic material. Although a portion of the
Military                     domestic wool production continues to be purchased for use by the U.S.
                             military, a new synthetic fabric for cold weather clothing may decrease
                             the military need for wool in the future.


Our 1982 Report Findings     In 1982 we reported that wool was no longer on the list of strategic
                             materials under provisions of the Strategic and Critical Materials Stock
on t he Strategic Role and   Piling Act (50 USC. 98 et seq.).AWe said that the increased use of syn-
Mili tary Use of Wool        thetic fibers in military items since the 1950s had diminished the impor-
                             tance of wool to the military. We used those findings as partial support
                             for our 1982 report conclusion that the major reasons for establishing
                             the wool payment program were no longer as important as they were
                             when the National Wool Act was enacted.


                             ‘The Stock Piling Act defines “strategic and critical materials” as materials that (a) would be needed
                             to supply the military, industrial, and essential civilian needs of the United States during a natronal
                             emergency, and (b) are not found or produced in the United States in sufficient quantities to meet
                             such need.



                             Page 20                                                GAO/RCELHO-51 Wool and Mohair Program
                                                  Chapter 2
                                                  Key Aspects   of the Wool Program




Our Current Findings on                           Wool has not been identified as a strategic and critical material under
the Strategic Role and                            the Stock Piling Act since 1960. Nevertheless. the U.S. military. through
                                                  the Defense Personnel Support Center (DPSC), Defense Logistics Xgency.
Military Use of Wool                              continues to (1) purchase wool and wool/blend items for its peacetime
                                                  needs, (2) stock wool and wool/blend items for its war material reserve.
                                                  and (3) maintain a list of wool and wool/blend items for its mobilization
                                                  requirements. DPSC’S responsibilities pertaining to these areas cover all
                                                  branches of service-the U.S. Navy, Army, Air Force, Marine Corps. and
                                                  Coast Guard.

                                                  The military’s current purchases of wool and wool/blend items for
                                                  peacetime needs are substantial, according to DPSC, and account for
                                                  about 8 percent of the annual domestic wool production. If mobilization
                                                  requirements were included, DPSC estimates that the military would
                                                  account for about 40 percent of the average annual domestic wool pro-
                                                  duction. DPSC’S peacetime purchases, coupled with its stock of wool and
                                                  wool/blend items for war material reserve and its list of wool and wool/
                                                  blend items needed for mobilization requirements, amounted to over 25
                                                  million pounds of clean wool’ in fiscal year 1989. Table 2.2 shows DPSC’S
                                                  wool statistics for 1989.

Table 2.2: Military   Wool Statistics,   Fiscal
Year 1989                                         Pounds In mllllons
                                                                                                       Equivalent     clean      Equivalent   grease
                                                  Wool usage                                                        pounds                    pounds
                                                  Purchases for oeacetlme needs                                        4 052                    a 104
                                                  Stock In war material reserve                                          628                     1 256
                                                  Mobillzatlon requirements                                          20 743                    41 486
                                                  Total                                                              25.423                    50.846
                                                  Source DPSC Wool Usage Study, April 1989.

                                                  The annual purchases of wool and wool/blend items for peacetime
                                                  needs, according to DPSC, have remained relatively constant over the
                                                  past several years, while the war material reserve stock has decreased
                                                  somewhat as the services have experienced budget constraints. DPSC
                                                  projects a significant decrease in future mobilization requirements. how-
                                                  ever, assuming that a new synthetic fabric for cold weather clothing will
                                                  eventually replace many existing items made from wool.




                                                  ‘Clean wool is that wool which has been processed to remove the grease and contammated fibers.
                                                  Prior to this process, the wool is referred to as grease wool.



                                                  Page 2 1                                            GAO/RCED90-51        Wool and Mohair    Program
                           Chapter 2
                           Key Aspects of the Wool Program




                           The U.S. Army plans to phase in an Extended Cold Weather Clothing
                           System that consists of a six-piece synthetic ensemble designed to
                           replace 13 existing items containing wool. If the Army obtains funding
                           from the Congress to fully implement this system, the resulting reduc-
                           tions in those wool items would be substantial. DPSC estimates that with
                           the new system, the wool content of the items listed in its mobilization
                           requirements in fiscal year 1990 would be about one-half of what it has
                           been in prior years. Beyond fiscal year 1990, the reduction could be
                           even greater, depending on how quickly the system is implemented.


                           Improvement in wool quality is not addressed in the act’s stated objec-
Program’s Impact on        tives, but is implied in the design of the shorn wool payment-higher
Wool Quality               support payments are made to producers who sell their wool at higher
                           prices. This payment method was discussed in the act’s legislative delib-
                           erations as an incentive to encourage producers to improve the quality
                           and marketing of their wool. While we indicated in our earlier report
                           that wool quality had not improved, our current findings indicate that
                           some attributes of wool quality appear to have improved since then.


Our 1982 Report Findings   We reported in 1982 that producer emphasis on lamb production and
on Wool Quality            wool contamination resulting from certain feeding, shearing, and wool
                           marketing practices had continued to impair wool quality.” USDA studies
                           indicated and industry representatives and sheep specialists believed
                           that wool quality had not improved; therefore, we concluded that the
                           wool program had not measurably improved wool quality.


Our Current Findings on    We found no published standards on the attributes of wool quality, and
                           little documentation is available on trends in domestic wool quality.
Wool Quality               Consequently, we obtained most of our information on wool quality
                           from representatives of U.S. wool mills, wool marketing businesses, uni-
                           versities, and the sheep industry. These representatives believe that
                           some attributes of wool quality have improved during the 1980s. While
                           we were unable to determine the wool program’s influence on wool qual-
                           ity, the payments are an incentive to improve such quality because they
                           are directly tied to the market prices that producers receive for the wool
                           they sell.


                           “USDA’s definition of wool quality as discussed in our 1982 report refers to attributes such as fiber
                           length, crimp (curl and wave). strength, elasticity, luster, and color.



                           Page 22                                                GAO/RCED!MJ51       Wool and Mohair     Program
                                   Chapter 2
                                   Key Aspects of the Wool Program




                                   The term “wool quality,” although not commonly used in current no01
                                   markets, has in the past been used to refer to a variety of wool attrib-
                                   utes and conditions that influence the market value of shorn wool. The
                                   Director, Yocom-McCall Testing Laboratories, Inc.-the only commercial
                                   wool testing laboratory in the United States-acknowledged     that the
                                   term “wool quality” has been applied to a variety of factors that can be
                                   broadly grouped as those that describe inherent attributes and those
                                   that address the preparation and marketability of wool.

                                   Inherent attributes of wool quality affect the spinnability of wool and
                                   the properties of the yarn and fabric made from it. These attributes
                                   include the degree of fineness and uniformity of wool fiber diameter.
                                   staple length, fiber strength, elasticity, crimp, and whiteness. In the U.S.
                                   wool grading system, the average fiber diameter and uniformity of fiber
                                   diameter within specified standards determine the grade of the wool.

                                   Preparation and market condition, as it relates to wool quality, can be
                                   influenced by such things as the skill with which the individual sheep
                                   are shorn, the cleanliness maintained in the shearing facility to avoid
                                   unnecessary contamination, and the extent to and skill with which addi-
                                   tional steps are taken, where practical, to improve the clean fiber con-
                                   tent and uniformity of the wool being packaged for market. These steps
                                   can include (1) shearing white-faced and black-faced sheep separately to
                                   avoid contaminating the white wool with additional black fibers; (2)
                                   skirting, which involves separating inferior portions such as the belly.
                                   leg, and head wool from the bulk of each fleece; (3) removing contami-
                                   nated fibers, such as unscourable paint brands,; vegetable matter, and
                                   polypropylene baling straps from the wool; (4) grading, which involves
                                   grouping and packaging the wool according to selected characteristics
                                   such as fiber diameter and length; and (5) objectively testing the pack-
                                   aged wool to determine its principle selling attributes (i.e., average fiber
                                   diameter, variability of fiber diameter, clean fiber present, vegetable
                                   matter present, and staple length).

Industry Representatives Believe   Industry representatives we contacted believe that some aspects of wool
That Wool Quality Has Improved     quality have generally improved during the 198Os, although they were
                                   unable to document the extent of these improvements. Quality improve-
                                   ments have reportedly been most evident in the wool produced in Texas



                                   ‘Paint brands are used to physically mark sheep for identification. if unscourable paint IS used. It
                                   should be cut away from the rest of the shorn wool during packaging because that portion cannot be
                                   used in most wool processing operations.



                                   Page 23                                               GAO/RCED90-61      Wool and Mohair    Program
Chapter 2
Key Aspects of the Wool Program




and other western range states, where about 80 percent of the domestic
wool is produced.

Representatives from U.S. wool mills and the sheep industry told us that
the quality of domestic wool, as it relates to grade, is comparable to that
of imported Australian wool (a commonly used industry benchmark
when discussing wool quality), but domestic wool is generally less uni-
form, contains more black fiber, and is not packaged and marketed to
wool export standards. Consequently, it sells at a lower price than
imported wool.

According to executives of the Columbia Wool Scouring Mills, a subsidi-
ary of Pendleton Woolen Mills, during the 198Os, and particularly in the
last 5 years, some U.S. sheep producers have made significant efforts to
improve the general market preparation of their wool. As a result, in
 1988 approximately 23 percent of the domestic wool examined was
skirted, compared to only a small quantity of skirted wool in 1980. Fur-
thermore, about 90 percent of the fine and medium grades of wool that
Pendleton examined in 1980 had some paint brand contamination,
whereas by 1988 only 20 percent of those wool grades contained such
contamination.

An executive of Burlington Menswear, another major U.S. wool process-
ing mill, said that contamination from paint brands and polypropylene
fibers was a big problem in wool 5 to 10 years ago. However, by 1988
these contaminants were no longer a problem because many producers
have taken steps to eliminate them.

The Director, Utah Wool Marketing Association, also stated that some
quality attributes of wool handled and marketed by his association has
improved during the 1980s. (The association is a producer-owned coop-
erative that, in 1988, processed and sold wool for its 400 members and
about 300 non-members.) The Director estimated that in 1980 about 50
percent of the wool his association marketed was contaminated by
unscourable paint brands and about 20 percent was contaminated by
polypropylene fibers. By 1988, the portion of paint brand and
polypropylene fiber contamination had been reduced to about 5 percent
and 1 percent, respectively.

In addition to these industry views on wool quality improvements, a
1988 research analysis of test records for breeding rams used in Texas-
based performance tests revealed that staple length and clean fiber con-
tent of some fine wools had markedly increased during the last 38


Page 24                                 GAO/RCED-!30-61   Wool and Mohair   Program
Chapter 2
Key Aspesta of the Wool Program




years.’ This analysis suggests that fine wool producers have managed
their breeding programs to maintain the fiber diameter and improve the
staple and clean fiber attributes of their wool.

Sheep industry and wool mill representatives also said that a number of
factors affect the practicality and economic incentive for some produc-
ers to better prepare and market their wool. These factors include the
following:

The economic incentive to better prepare wool (i.e., skirt and grade it
prior to packaging) and market the packaged wool on a basis of objec-
tive testing is more appropriate for medium and fine grades of wool and
is less appropriate for coarse grades of wool. Generally, the coarser
wools are produced and sold in small lots and are processed in systems
that have a greater tolerance for variance of attributes such as fiber
diameter and staple. Consequently, buyers will not pay producers pre-
miums for additional preparation of these wools.
A Texas Agricultural Experiment Station wool specialist said that some
steps to improve wool quality through preparation are practical for
most producers (i.e., skirting fleeces). However, other steps, such as
wool grading prior to packaging, require a high level of training and skill
that is now not generally available to U.S. producers.
An ASIA representative said that it is impractical now for many domestic
producers to have their wool objectively tested to identify its main sell-
ing points and to provide producers with important data on the quality
attributes of their wool. The smallest volume of wool that can be core
sampled for laboratory testing in accordance with current official stan-
dards is limited to lots containing a minimum of 25 bags of wool (fleeces
from about 500 sheep).
Some wool marketing businesses and mills are willing to pay premiums
for better prepared and objectively tested wool, while others are not,
according to sheep industry and wool mill representatives. This means
that some producers who perform the additional steps and incur addi-
tional costs to skirt, grade, and have wool objectively tested may not
benefit financially from these steps.

Based on the information we collected, we were unable to determine to
what extent the wool program influences wool quality. While the pay-
ments are an incentive to improve wool quality, at some point the costs


‘Should We Be Selecting For Finer Wool?. Texas A&M University Agricultural Experiment Station.
Technical Report. No. 882, 1988.



Page 25                                             GAO/RCED90-51 Wool and Mohair Program
                           Chapter 2
                           Key Aspects of the Wool Program




                           of such improvements may exceed the added program payments
                           received.


                           In addition to providing shorn wool payments, the program provides
Program’s Impact on        payments for unshorn lambs for the purpose of maintaining the normal
Maintaining Normal         industry practice of marketing lambs unshorn.” While most of the con-
Marketing Practices        tacts included in our 1982 report took the position that the unshorn
                           lamb payments were not meeting their intended objective, many of our
by Providing Unshorn       latest contacts believe that these payments are a factor in producers’
Lamb Payments              shearing decisions. However, it is unclear how the unshorn lamb pay-
                           ments would affect such decisions if, in fact, producers were to receive
                           higher prices for unshorn lambs than for shorn lambs.


Our 1982 Report Findings   In 1982 we reported that unshorn lamb payments for marketing year
                           1980 totaled $5.5 million, which represented about 15 percent of all pro-
on Unshorn Lam .b          gram payments made to wool producers that year. Other factors besides
Payments                   the unshorn lamb payments-such        as shearing costs, the value of lamb
                           pelts, and the availability of shearers-determined    whether lambs were
                           shorn before marketing or slaughter. The unshorn lamb payments were
                           also more difficult and time consuming for ASCSto administer than were
                           the shorn wool payments. This difficulty results from the problem of
                           verifying the accuracy of the data obtained to compute the unshorn
                           lamb payments. We concluded that unshorn lamb payments-intended
                           to maintain the normal practice of marketing lambs unshorn-do         not
                           influence whether lambs are shorn. We therefore recommended that the
                           Congress eliminate unshorn lamb payments from the wool program.


Our Current Findings on    In discussing the unshorn lamb payment provision with wool industry
                           representatives, sheep and wool specialists, and producers, we received
Unshorn Lamb Payments      mixed views as to whether the unshorn lamb payment is a factor in
                           shearing decisions. ASIA representatives, for example, believe that the
                           decision to market lambs either shorn or unshorn is an economic deci-
                           sion involving a number of factors, including the availability of the
                           unshorn lamb payments. Other factors include (1) the availability of




                           ‘The act specifies that support prices shall be provided for pulled wool for this purpose. According to
                           USDA, the use of payments to provide price support with respect to unshorn lambs was Implemented
                           upon enactment of the act to accomplish similar purposes as that for pulled wool.



                           Page 26                                                GAO/RCED-90-51      Wool and Mohair    Program
                      Chapter 2
                      Key Aspects   of the Wool Program




                      shearers to a producer-generally,   feedlots have better access to shear-
                      ing crews; (2) the age of the iambs marketed-generally,   it is not eco-
                      nomical to shear lambs younger than six months of age; and (3) the time
                      of year the lambs are marketed-often,    lambs are sold unshorn during
                      cold weather, whereas older lambs marketed in warmer or wet weather
                      may be shorn to avoid muddy pelts.

                      During the period since our previous report (1981 through 1987) about
                      $106.8 million has been paid to producers and feedlot operators for
                      unshorn lamb payments, which represents about 20 percent of the total
                      wool payments made during that period. The ASIArepresentatives
                      agreed that the unshorn lamb payments are more difficult for ASCSto
                      administer than are the shorn wool payments. They stated, however,
                      that because lamb marketing is an economic decision and the unshorn
                      payments do compensate sheep producers for lambswool they produce,
                      excessive lamb shearing would take place before marketing in order to
                      obtain a shorn wool payment if the unshorn lamb payments were elimi-
                      nated. They believe the resulting additional shorn wool payments would
                      largely offset any anticipated savings from the elimination of unshorn
                      lamb payments.

                      Others we contacted, including representatives of the ASCSand the
                      National Lamb Feeders Association and several sheep producers, stated
                      that factors other than the unshorn lamb payments, such as the availa-
                      bility of shearers and the competitive prices of shorn and unshorn lamb
                      pelts, are generally used as the basis for producers’ lamb-shearing deci-
                      sions. Their positions were in line with those cited in our 1982 report.


                      The National Wool Act, as amended, also includes several broad eco-
Program’s Impact on   nomic objectives as part of its policy statement. Specifically, the domes-
Other Objectives of   tic production of wool should be encouraged to promote (1) a positive
the Act               balance of trade, (2) the general economic welfare, and (3) the efficient
                      use of the nation’s resources. In our 1982 report, we did not focus on
                      these broad, less measurable objectives. Instead, we focused on the more
                      measurable aspects of (1) encouraging wool production, (2) improving
                      wool quality, (3) maintaining normal marketing practices by providing
                      unshorn lamb payments, and (4) providing needed domestic wool sup
                      plies to the US. military. In our current review, we did not attempt to
                      independently determine to what extent the wool program affected
                      these broad objectives because to do so would have required a complex
                      and costly analysis. However, we did gather available information that



                      Page 27                                GAO/RCED9&51   Wool and Mohair   Program
Chapter 2
Key Aspects of the Wool Program




discussed these objectives to some degree. We should point out the possi-
bility. however, that the funds used to support wool producers could
have been better used to accomplish a positive effect on the balance of
trade, the general economic welfare, and the efficient use of the nation’s
resources, had they been spent in other ways.

Regarding the wool program’s effect on the balance of trade, a 1984
I'SDA EM report stated that the additional wool production caused by the
wool program likely replaces some imported wool in U.S. mills. ERSesti-
mated that during the period 1977 through 1983, wool program pay-
ments on average affected the balance of trade by reducing wool
imports about 16 million pounds per year (about 18 percent of the total
domestic production).

Regarding the wool program’s contribution to promoting the general eco-
nomic welfare and the efficient use of the nation’s resources, we did not
determine what, if any, impact was realized in these areas. However,
according to the legislative history that preceded the National Wool Act,
there was a belief by some members of the Congress that a wool pro-
gram would (1) help promote the general economic welfare by benefiting
small farmers and other groups, such as the Indians, and (2) contribute
to a more efficient use of the nation’s resources by promoting the use of
land that would otherwise not be productive.

Studies performed by USDA and the independent Council for Agricultural
Science and Technology state that sheep and wool production is impor-
tant to the economy of many small communities because portions of the
land are marginal for agricultural uses other than for grazing livestock.
According to these studies, in areas where particularly harsh conditions
exist, such as in some Texas rangelands, sheep and goats are the only
livestock suitable for agricultural use. In other areas, grazing sheep and
goats with cattle can result in more efficient use of the resources
because each species prefers different types of vegetation. By mixing
these species on ranges in the combination best suited to the vegetation,
livestock producers can increase their total stock and the production of
meat, wool, and mohair. However, if actions such as mixing species
increase the profits of livestock producers anyway, then it is unclear to
what extent wool payments contribute to the efficient use of the
resources.




Page 28                                 GAO/RCED-SIN51   Wool and Mohair   Program
                      Chapter 2
                      Key Aspecta of the Wool Program




                      In commenting on a draft of this report IXDA identified two areas in this
Agency Comments and   chapter where clarification was needed. First, LXDApointed out that our
Our Evaluation        statement, “The act directs the Secretary to support the price of wool at
                      not less than 60 percent nor more than 110 percent of wool parity”
                      depicted what was in the original 1954 act, but it failed to recognize
                      subsequent legislative amendments that changed the price support cal-
                      culations. We revised the report to make it clear that the cited statement
                      refers to the 1954 act only. We emphasize, however, that the primary
                      purpose of that section of the report is to point out that industry repre-
                      sentatives believe that the subsequent changes in the price support
                      levels may have limited the program’s impact on encouraging wool
                      production.

                      Second, USDAindicated that our statement, “In addition to providing
                      shorn wool payments, the act provides payments for unshorn lambs”
                      was incorrect, as the act merely provides for pulled wool payments.
                      USDAstated, however, that unshorn lamb payments were implemented
                      upon enactment of the act to accomplish similar purposes as that for
                      pulled wool. We revised the cited statement and added a footnote to the
                      report to clarify this issue.


                      In commenting on a draft of this report, ASIA stated that we had chosen
Industry Comments     to identify objectives for study that provided little basis for evaluating
and Our Evaluation    the success of the program. ASIAbelieved that the program’s impact on
                      wool production stabilization, wool quality improvements, wool produc-
                      tion decisions, and rural economies were all consistent with the wishes
                      of the Congress and USDAand should therefore have been used in our
                      evaluation of the program’s success. While we recognize in the report
                      that the wool program payments have done some positive things from
                      an industry perspective, we continue to question the need for the pro-
                      gram based on its high subsidy cost and the more than 30-year slide in
                      wool production. In the final analysis, the Congress must decide whether
                      the accomplishments of the program outweigh the costs.

                      In conjunction with this statement, ASIA asserted that we unduly allowed
                      biases to be introduced into the report, particularly where we indicate
                      that “the funds used to support wool producers could have been better
                      used to accomplish a more positive effect on the balance of trade, the
                      general economic welfare, and the efficient use of the nation’s resources,
                      had they been spent in other ways.” In our full statement, we point out
                      that this is a possibility only, and from an economic standpoint, we
                      believe this needs to be considered when analyzing how the program


                      Page 29                                 GAO/RCED-So51   Wool and Mohair   Program
Chapter 2
Key Aspects of the Wool Program




affects these broad wool objectives. Resources in our market based econ-
omy are allocated in response to changing consumer preferences and
resource costs. Scarce resources are bid for and garnered by the most
efficient users of those resources. Similarly, the economics of compara-
tive advantage, which is the cornerstone of free trade. indicate that the
greatest contributions to our nation’s balance of trade will come from
those industries that are most efficient compared to their foreign com-
petitors. The decline in our wool and mohair industries does not suggest
that, left to their own devices, these industries would be the highest bid-
ders for scarce resources or contribute most to our balance of trade.

ASIA made several comments regarding improvements in wool quality
and stated that these improvements were attributable to the wool pro-
gram. However, as we state in our report, while some aspects of wool
quality appear to have improved during the 1980s we could not deter-
mine to what extent, if any, these improvements were due to the wool
payments.

ASIA also made several comments regarding the military need for, or use
of, wool. While these comments may have some validity, they are not
germane to the issue being discussed in the report. That is, the National
Wool Act states that wool is an essential and strategic commodity, and
the wool program is justified in part on the basis that wool production is
encouraged as a measure of national security. Because wool has not
been identified as a strategic and critical material since 1960, we ques-
tion the rationale for continuing to support the wool program based on
its strategic importance to the military.

ASIA questioned our use of a study to estimate the “social cost” of the
wool program that focused entirely on increased wool production. The
true social cost, according to ASIA,should take into account all products,
including lamb meat production, that would increase in conjunction with
any increase in wool production. We agree that sheep provide two prod-
ucts-meat and wool. However, we should point out that if the program
does in fact encourage wool and lamb meat production in excess of what
the market for these products would otherwise justify, then this is evi-
dence that there is a net social cost to the program. To demonstrate
otherwise would require substantial evidence suggesting that, at least
for sheep, the market does not work to achieve economic efficiency.

ASIA also commented on the program’s design that allows wool payments
to fluctuate in relation to producers’ incomes, thereby providing income



Page 30                                 GAO/RCED-9061   Wool and Mohair   Program
Chapter 2
Key Aspects of the Wool Program




stability. In addition, ASIA stated that, if congressional and agency limi-
tations had not been imposed on the payments, the decline in sheep
inventory would have stabilized years ago. We address the issues of
income stability and payment limitations in detail in this chapter and
our treatment of them is consistent with MIA’S comments. We have no
basis to comment on MIA’S assertion that the sheep inventory would
have stabilized years ago if payment limitations had not been imposed,
as that is speculation on the part of SIA.

ASIA stated that we did not attempt to weigh the information  we
obtained from documents and interviews. In our opinion, it would not
have been practicable to weigh the value of the information we obtained
from these sources. As we point out in chapter 1, we covered an array of
material, organizations, and individuals during our review. We inter-
viewed recognized experts in all aspects of the industry and believe they
are all knowledgeable of the issues.




 Page 31                                  GAO/RCRD-!I@51   Wool and Mohair   Program
Chapter 3

Other Aspects of the Wool Program


                               As requested, we evaluated three additional aspects of the wool pro-
                               gram. Specifically, we examined the (1) impact that the elimination of
                               wool payments would have on wool import tariffs; (2) administrative
                               costs associated with the wool program; and (3) impact on recipients if
                               they no longer received wool payments, especially those who receive
                               small payments of less than $100 a year. In summary, we found the
                               following:

                               The collection of wool import tariffs would not be directly affected by
                               the elimination of wool payments, although the amount of tariffs col-
                               lected each year governs the total amount that can be spent on the wool
                               program.
                               The operating costs of the wool program during the 7-year period 1981
                               through 1987 averaged $6.19 million a year. These costs include interest
                               expenses incurred by CCC for borrowing funds from the U.S. Treasury
                               and AXS administrative expenses.
                               No specific analysis has been performed to determine the impact on
                               recipients if they no longer received wool payments, especially those of
                               less than $100. Officials we spoke with from the Navajo reservation and
                               others representing specialty wool producers and small farm flocks
                               stated that the elimination of small payments could adversely affect
                               some producers.


                               The collection of wool import tariffs would not be affected by the elimi-
The Relationship of            nation of the wool program. Wool import tariffs are not provided
WOOI   ImpOfi   Tariffs   to   directly to ccc to fund the wool program nor would they automatically
the Wool Program               cease if the program were eliminated. According to an official of the
                               International Trade Cornmission who is responsible for wool commodi-
                               ties listed under the tariff schedules, most import tariffs were imposed
                               by the Tariff Act of 1930, some 24 years before the wool program was
                               established under the National Wool Act of 1954. This official stated
                               that even though the wool import tariffs are currently linked through
                               legislation to the wool program, they were not initially established to
                               fund that program. Therefore, without new legislation, the collection of
                               the tariffs would continue regardless of the outcome of the wool
                               program.

                               The wool program as presently constituted does, however, depend on
                               the wool import tariffs. These tariffs, once collected, go to the U.S. Trea-
                               sury. CCC borrows funds as needed from the U.S. Treasury each year to
                               operate the wool program. An automatic annual appropriation is pro-
                               vided by the Congress to reimburse ccc, which in turn pays the US.


                               Page 32                                  GAO/RCED-INS51   Wool and Mohair   Program
Chapter 3
Other Aspects   of the Wool Program




Treasury for the monies it has borrowed the preceding year. Before this
appropriation, however, the U.S. Treasury receives notification from the
Bureau of Census on the amount of wool import tariffs collected to
ensure that the yearly amount appropriated does not exceed the limita-
tions established under the act.

The National Wool Act of 1954 provides for the government, through
the ccc, to incur expenses in connection with the wool program, but it
limits the cumulative and annual expenses that may be incurred. Sec-
tions 704 and 705 of the act specifically link program spending levels to
duties (tariffs) collected on imported wool and other textile products.

Section 704 of the act states that the cumulative total of all wool pay-
ments made shall not exceed 70 percent of the gross receipts from duties
collected on and after January 1, 1953, on all articles subject to duty
under schedule 11 of the Tariff Act of 1930, as amended.’ Through cal-
endar year 1988, over $6 billion in gross receipts from such tariffs have
been collected, while the cumulative costs of the wool program have
amounted to about $2 billion.

Section 705 of the act states that the amount appropriated each fiscal
year to reimburse CCCfor wool program expenses shall not exceed 70
percent of the gross receipts from import duties collected during each
preceding calendar year.z Any fiscal year expenditures exceeding the
annual limitation may be carried over and included in future fiscal year
appropriations, as necessary. Since the start of the wool program in fis-
cal year 1955, there have been 6 years when portions of the annual pro-
gram costs have had to be carried forward to subsequent years for
reimbursement purposes because the costs exceeded the annual 70-per-
cent limitation. The last year this occurred was in fiscal year 1973. Since
then, the applicable annual tariffs collected have by far exceeded the
annual program costs incurred.

Although we did not evaluate the rationale for imposing the initial wool
tariffs under the Tariff Act of 1930, the rationale for setting the pro-
gram spending levels at no more than 70 percent of the wool import tar-
iffs is found in statements made in the July 26, 1947, Congressional

‘The Tariff Act of 1930 was amended by the Tariff Classification Act of 1962, wherein Schedule 11
became Schedule 3. Subsequently, on December 31, 1988, Schedule 3 was replaced with a harmonized
tariff schedule. Under the latter schedule, tariffs for imported wool and other fiie ammal hair prod-
ucts are listed in numerous sections.

%CC operates as a revolving fund, and funds are appropriated each year after the fact to replenish
funds spent in prior years.



Page 33                                               GAO/RCED-9041      Wool and Mohair    Program
                                       Chapter 3
                                       Other Aspects of the Wool Prom




                                       Record, as well as in testimony provided before the House Committee on
                                       Agriculture on November 4, 1953. These sources indicate that while 30
                                       percent of the wool tariffs were being used to support other agricultural
                                       commodities (such as cotton and wheat), none of the tariffs were being
                                       used to support wool. Consequently, the wool-growing industry sug-
                                       gested that the 70 percent of the tariffs not being used for other com-
                                       modities be made available for payments to domestic wool producers.
                                       The National Wool Act of 1954 included the suggested provision,
                                       thereby establishing the 70-percent limitations for funding the wool
                                       program.


                                       From fiscal years 1981 through 1987, operating costs for the wool pro-
Annual Operating                       gram totaled over $43 million. The average annual operating costs dur-
Costs of the Wool                      ing that 7-year period totaled $6.19 million.:’
Program                                As shown in Table 3.1, annual operating costs for the wool program (in
                                       actual dollars) consist of two types of expenditures: (1) interest
                                       expenses that represent the ccc’s cost of borrowing funds from the U.S.
                                       Treasury and (2) administrative expenses that represent compensation
                                       to ASCSfor salaries and related expenses to administer the program.
                                       While interest expenses have varied because of fluctuating interest
                                       rates and program payment levels, administrative expenses have
                                       remained fairly constant.

Table 3.1: Annual Operating Costs
Related to the National Wool Act for   Dollars In thousands
Fiscal Years 1981-1987                                                                           Administrative
                                       Fiscal year               Interest   expenses                  expenses     Total operating     costs
                                       1981                                     $2,718                     $1,790                     $4,508
                                       1982                                      2,929                       2,120                      5,049
                                       1983                                      2,949                       2.344                      5293
                                       1984                                      6,343                       2,414                     8,757
                                       1985                                      4,386                       2,438                      6824
                                       1986                                      4,005                       2,188                     6,193
                                       1987                                      4,371                       2.352                     6.723
                                                                                                                                     $43.347
                                       Source ASCS Budget Office.




                                       .‘At the time of our review, actual operating costs for fiial year 1988 were available, but they were
                                       not used in our computations because the 1988 Appropriations Act provided for CCC to receive, for
                                       the first time, an advance wool appropriation of %126 million. Therefore, interest expenses incurred
                                       in 1988 amounted to only $617,000, which was not representative of prior years’ interest expenses.



                                       Page 34                                                GAO/RCED-90-U      Wool and Mohair     Program
                                         Chapter 3
                                         Other Aspects of the Wool Program




                                         We did not find any economic analyses that specifically determined
Impact on Small                          what the impact might be on recipients if small wool payments were
Payment Recipients If                    eliminated. Therefore, we relied on statements made by industry repre-
They No Longer                           sentatives who indicated that the elimination of such payments could
                                         have an adverse impact on certain producers.
Receive Wool
Payments                                 In our 1982 report, we stated that, for marketing year 1980, about 63
                                         percent of the number of wool payments, representing less than 6 per-
                                         cent of the amount of the payments, were made to sheep producers who
                                         received less than $100. Nearly all of those small payments were going
                                         to noncommercial producers who, according to USDA’S definition, conduct
                                         farm operations with less than 50 sheep. On the basis of available infor-
                                         mation, we concluded that (1) noncommercial sheep producers did not
                                         rely on income received from sheep and (2) wool payments to those pro-
                                         ducers were not accomplishing their intended objective of encouraging
                                         wool production. Consequently, we recommended that the Congress
                                         eliminate wool payments to noncommercial sheep producers. In making
                                         this recommendation, we did not analyze what the impact would be on
                                         recipients of small or large payments if they no longer received such
                                         payments.

                                         To update the information in our earlier report, we obtained tics statis-
                                         tics on the number and amounts of wool payments made, by size cate-
                                         gory, for marketing year 1986, which at the time of our review was the
                                         latest ASCSdata available for such analysis. These statistics are shown in
                                         Table 3.2 below.

Table 3.2: Wool Payments   Made During
Marketing Year 1986                                                                                                                Percent
                                                                                                 Percent of                              of
                                         Size of oavment                             Number         number             Amount      amount
                                         Lessthan$    100.00                           51,868           41.4        $2~554,571          25
                                         $ looto$    19999                             26,060          20.8          3,728,031          36
                                         $ 200to.$ 499.99                              24,232           19.3         73594,887          73
                                         $ 500to $ 699.99                               5.714            4.6         3.371.969          32
                                         $ 700to $ 999.99                               4,622            3.7         33853.964          37
                                         $1,000to$24,99999                             12,209            97         48,498,621         46 6
                                         $25,00Oandover                                   673              .5       34,399,484        33.1
                                         Total                                       125.378          100.0      $104.001,527        100.0
                                         Source. ASCS data, with GAO calculations.


                                         As the table indicates, the number of wool payments made for less than
                                         $100 represented about 41 percent of the total payments made during


                                         Page 36                                                GAO/RCEJI-9651   Wool and Mohair   Program
                       Chapter 3
                       Other Aspects of the Wool Program




                       1986. With no adjustment for inflation, this represents a 22-percentage
                       point decrease from the 63-percent level of 1980. If inflation were con-
                       sidered, the decrease would be somewhat smaller because a .S100 pay-
                       ment in 1980 corresponds to about a $133 payment in 1986. I The value
                       of those small payments made in 1986 represented only 2.5 percent of
                       the total value of all payments, which was down significantly from the
                       6-percent level of 1980. We point out, however, that this data should not
                       be construed as a trend in decreased small payments to producers, but
                       rather that it may vary from year to year.

                       Most of the wool payments of less that $100 were concentrated in two
                       geographic areas -the Midwest (with over 44 percent of the number
                       and dollars) and the Southwest (with over 22 percent of the number and
                       dollars). It is likely, therefore, that the elimination of wool payments of
                       less than $100 would affect producers in those areas more than others.


Elimination of Small   According to the Director of the Navajo Wool and Mohair Marketing
                       Industry, Shiprock, New Mexico, there are 10,000 to 15,000 sheep pro-
Payments Could Affec   ducers located on the Navajo reservation. While not all of those produc-
Certain Producers      ers receive wool program payments, about 7,000 to 10,000 do, and each
                       maintains an average flock of about 20 sheep. The Director said that
                       about 90 percent of the participating producers receive wool payments
                       of less than $100 each year. These producers are concentrated in the
                       Four Corners area of Arizona, New Mexico, Utah, and Colorado, and
                       elimination of the small payments would likely have a detrimental effect
                       on them. Furthermore, because most of the iamb meat produced is used
                       by the Navajos as a food source, wool sales combined with the wool pay-
                       ments generally provide the principal income derived from their sheep.

                       The former president of the New Mexico Wool Growers Association,
                       who is also a wool warehouse owner in that state, told us that many of
                       the producers using his facilities have small numbers of sheep; there-
                       fore, they generally receive wool payments of less than $100 a year. In
                       his opinion, the producers in his rural area would be affected dramati-
                       cally if these small payments were eliminated.

                       A spokesperson for the Wool Forum, Inc., of Henning, Minnesota, a coa-
                       lition of producers and users of premium wool, told us that the small
                       payments are a worthwhile investment in the wool industry of the

                       ‘Based on our calculations, using the implicit price deflator for Gross Sational Product as shown In
                       the January 1989 Economic Report of the President.



                       Page 36                                                GAO/RCED-SO-51     Wool and Mohair    Program
                      Chapter 3
                      Other Aspects of the Wool Program




                      future, as many of the new producers are from non-farm backgrounds
                      and are hesitant to risk a large investment because of their lack of espe-
                      rience. In his opinion, the wool program adds that little extra financial
                      encouragement that makes these new producers go ahead with their
                      investments.

                      In addition to the statements supporting small payments mentioned
                      above, some members of the Congress, together with individual produc-
                      ers and industry representatives, supported payments to small farm
                      operations (including Indians) during deliberations prior to the National
                      Wool Act. According to these individuals, small farm operations
                      represent an important part of the overall sheep and wool industry.


                      In its comments to our draft report, USDAmade one comment applicable
Agency Comments and   to this chapter. USDAstated that we should clarify the report to make the
Our Evaluation        point that the data we obtained on small payments should not be con-
                      strued to indicate a trend in decreased small payments, but rather that
                      small payments may vary from year to year. We added a clarifying
                      statement in this chapter, as USDAsuggested.


                      In its comments to our draft report, MIA also made several comments
Industry Comments     applicable to this chapter. These comments related to the program’s
and Our Evaluation    annual operating costs. According to ASIA, the tone we use in the report
                      gives the reader the feeling that these costs are burdensome. Further-
                      more, ASIA states that the report implies that if the program were dis-
                      continued, a savings in administrative costs would occur, which MIA
                      believes is a false assumption. No such implications were made in our
                      report. We merely present factual data, in response to Representative
                      Schumer’s request, on the annual and total operating costs of the pro-
                      gram from 1981 through 1987.

                      In a related comment, ASIA states that future administrative costs will be
                      only about $2 million a year because advance appropriations will pre-
                      clude CCCfrom having to borrow funds and to pay interest to the U.S.
                      Treasury. This is speculation by ASIA because, as we point out in a foot-
                      note in this chapter, such an advance appropriation has only been pro-
                      vided once, and there is no indication that this will occur again in the
                      future.




                      Page 37                                 GAO/RCED9@51   Wool and Mohair   Program
Chapter 4

Basis for Mohair Payments Has Not Been
Clearly Established

                        The Xational Wool Act of 1954 provided for financial support to mohair
                        producers as well as to wool producers. The act did not, however,
                        include any objectives specifically directed at mohair, nor did its legisla-
                        tive history include any dialogue about the merits of providing federal
                        support to mohair producers. According to hearings held prior to the
                        act, the price of mohair was supported because mohair was included in a
                        number of earlier wool programs and was generally considered to be
                        part of the sheep industry. While the mohair industry experiences many
                        of the same problems as the wool industry, such justification for mohair
                        payments is difficult to support.


                        Prior to our 1982 report, mohair payments represented only a small por-
History of the Mohair   tion of the overall program payments. As we pointed out in that report,
Program                 mohair payments had been made in only 8 of the 26 years since the pro-
                        gram began in 1955, and those payments had amounted to only $51 mil-
                        lion, which was less than 5 percent of the total program payments made
                        through 1980. Furthermore, because the average market price for
                        mohair had been above the support price from 1972 through 1980, no
                        mohair payments had been made during the g-year period preceding our
                        report coverage.

                        Since 1980, mohair payments have become a more significant part of the
                        overall wool program. The average market price for mohair dropped
                        from $3.50 a pound in 1981 to $1.89 a pound in 1988, while the corre-
                        sponding support price established under the formula in the National
                        Wool Act rose from $3.72 to $4.69, respectively. At the same time, the
                        domestic production of mohair nearly doubled, from 10.1 million pounds
                        in 1981 to 17.3 million pounds in 1988. The combination of these factors
                        resulted in payments of $173 million to mohair producers under the
                        wool program since 1981, as shown in Table 4.1 below.




                        Page38                                  GAO/RCED-9@51
                                                                           Wooland Mohair Program
                                   Chapter 4
                                   Basis for Mohair Payments     Has Not Been
                                   Clearly Established




Table 4.1: Mohair Production and                                                                                -    ,.- ,-  ._- -,,-
Payment Statistics, 1981-l 988                                                                                             Government
                                   Marketing   Production      (pounds                                 Average        payments (dollars
                                   year                     in millions)      Support    price     market price              in millions)
                                   1981
                                   --                                10 1               $3718                $350                     $1 9
                                   1982                              100                 3977                 255                      168
                                   1983                              106                 4627                 4 05            -   ~- ~~ 63
                                   1984                              112                 5.169                430                      103
                                   1985                              13.3                4430                 345                      126
                                   1986                              16.0                4.930                2.51                     42 7
                                   1987                              16.2                4950                 2 63                     35 3
                                   1988                              173                 4690                 1 89                     47 1
                                                                                                                                     $1730
                                   Source USDA’s ASCS Commodity        Fact Sheet. April 1989


                                   In 1988 mohair producers became the predominant recipients of the
                                   payments for the first time since the wool program began. The 1988
                                   mohair payments of $47.1 million represented over 53 percent of the
                                   total program payments made that year (wool payments were $41.4 mil-
                                   lion). Furthermore, because there are only about 12,000 mohair produc-
                                   ers in the United States as compared with about 115,000 wool
                                   producers, the average payment received by mohair producers in 1988
                                   (about $3,925) was at a much higher level than that received by wool
                                   producers (about $360).


                                   The National Wool Act of 1954 contained no specific mohair objectives.
The National Wool Act              However, some legislative references in support of mohair as part of the
of 1954 Did Not                    wool program are found in events and hearings that preceded the 1954
Specify Mohair                     Act. For example, a ccc loan program in 1938 and 1939 included wool
                                   and mohair under the same program; the Wool Products Labeling Act of
Objectives                         1939 included mohair as wool; and during World War II, the War Pro-
                                   duction Board classified mohair as war-quality wool. Also, a mandatory
                                   price support program for wool enacted in 1949 included mohair
                                   because as tariffs were reduced mohair producers were beginning to lose
                                   their domestic market-primarily      mohair upholstery-to      foreign
                                   imports of coarse wool. In conjunction with these legislative actions, tes-
                                   timony presented at hearings on the wool program pointed out that
                                   mohair had always been treated as wool. Nevertheless, while these vari-
                                   ous references exist, there is nothing in the legislative history of the act
                                   that discusses the merits of a mohair payment program or describes
                                   what the mohair payments are to accomplish.




                                   Page 39                                                  GAO/RCELb90-51    Wool and Mohair      Program
                    Chapter 4
                    Basis for Mohair Payments   Has Not Been
                    Clearly Established




                    Although no specific legislative objectives have been established for
The Broad Wool      mohair, the National Wool Act states that the wool program was estab-
Objectives Do Not   lished in part to promote a positive balance of trade, the general eco-
Apply to Mohair     nomic welfare, and the efficient use of the nation’s resources. On the
                    basis of the information we obtained during this review, we do not
                    believe similar broad objectives could be cited to support a mohair pro-
                    gram. However, because mohair has historically been treated as wool,
                    we looked at the extent to which the broad wool objectives could apply
                    to mohair. It is important to keep in mind, however, as we pointed out
                    earlier about wool producers, that the funds used to support mohair
                    producers could possibly have been better used to accomplish these
                    broad objectives had they been spent in other ways.

                    Regarding the use of mohair in international trade, in 1988, about 14.4
                    million pounds of domestically produced mohair, valued at $36.2 mil-
                    lion, was exported. The United States is the second largest mohair-pro-
                    ducing nation in the world but it no longer has much need for mohair
                    until after it has been exported to other countries, processed into yarn,
                    fabric, or finished goods, and then is imported in product form. From
                    1937 to 1947, domestic mills processed about 20 million pounds of
                    mohair annually, but in recent years the mills have processed only about
                     100,000 to 200,000 pounds annually. As a result, other countries have
                    become the major market for U.S.-produced mohair, and over 80 percent
                    of the annual domestic production is exported. According to the Mohair
                    Council of America, Europe and Asia are the two largest consumers of
                    U.S.-produced mohair.

                    Regarding the mohair industry’s possible link to the wool program’s
                    objectives of promoting the general economic welfare and the efficient
                    use of the nation’s resources, the primary evidence we found was in tes-
                    timony presented by industry officials during congressional debates on
                    the National Wool Act. In that testimony, mohair was mentioned in the
                    context of the importance of goats and sheep to Texas agriculture. (In
                     1987, Texas produced about 88 percent of the domestic mohair.) Indus-
                    try representatives claimed that the mohair industry promoted the gen-
                    eral economic welfare and the efficient use of the resources in areas
                    such as Texas.

                    The president of the Texas Sheep and Goat Raisers Association testified
                    that the production of sheep and goats on the semi-arid lands of West
                    Texas is vital to the state’s economy and is the best use for most of the
                    land in that area. Similarly, a former executive secretary of NWGA testi-
                    fied that much of the industry’s production was in areas of the western


                    Page40                                     GAO/RCED-9@61   Wool and Mohair   Progmm
                     Chapter 4
                     Basis for Mohair Payments   Has Not Been
                     Clearly Established




                     United States where only sheep and goats could utilize the resources,
                     and it was not economically possible to change to any other type of
                     animal or agricultural . production.


                     In commenting on a draft of this report, the Mohair Council of America
Industry Comments    made several comments pertinent to this chapter. For example, the
and Our Evaluation   Council questioned our statement that mohair had no defined basis in
                     the National Wool Act of 1954. The Council believes that the legislative
                     references in support of mohair, as we discuss them in this chapter, are
                     the basis for the mohair program. While we agree that legislation in the
                     1930s and 1940s linked mohair and wool as war-quality materials, we
                     believe that in today’s environment the use of such legislation is not
                     appropriate. Furthermore, it is important to emphasize, as we do in the
                     report, that the National Wool Act of 1954 made no reference to mohair
                     in its objectives statement.

                     The Council noted that our draft report stated that Europe is only a
                     processor of mohair, whereas Europe and Asia are the two largest con-
                     sumers of U.S.-produced mohair. We have revised this report to incorpo-
                     rate the Council’s statement.

                     The Council provided us information pertaining to revenue that U.S.
                     producers receive from mohair exports and stated that this revenue
                     added to a positive balance of trade. In addition, the Council provided
                     similar information showing, in its opinion, that the mohair program
                     adds to the general economic welfare and the efficient use of the
                     nation’s resources. While we recognize in this chapter that such informa-
                     tion exists, we continue to question how the mohair payments contrib-
                     ute to these broad wool objectives.

                     The Council speculated about what could happen to mohair payments in
                     the next few years as market prices decline or rise. In addition the
                     Council stated that the increased mohair production from 1981 to 1988
                     proved the effectiveness of the Wool Act to insure production and
                     growth during difficult periods. We have no basis for commenting on the
                     Council’s speculations and, as we point out in this chapter, no analysis
                     has been done to determine if the mohair payments contribute to any of
                     the wool program objectives. Our major concern is that mohair pay-
                     ments have increased greatly over the last few years, while there have
                     been no specific objectives established for the mohair program.




                     Page 41                                    GAO/RCENO-51   Wool and Mohair   Program
Chapter 4
Basis for Mohair Payments   Has Not Been
Clearly Established




The Council suggested that our statement “the money used for the iv001
Act could have been spent in other ways” should be deleted. as it cvas
conjecture on our part. The actual statement, as written in this chapter,
informs the reader that “it is important to keep in mind that the funds
used to support mohair producers could possibly have been better used
to accomplish these broad objectives had they been spent in other
ways.” This statement indicates only that a possibility exists for better
use of the funds. Resources in our market based economy are allocated
in response to changing consumer preferences and resource costs. Scarce
resources are bid for and garnered by the most efficient users of those
resources. Similarly, the economics of comparative advantage, which is
the cornerstone of free trade, indicate that the greatest contributions to
our nation’s balance of trade will come from those industries that are
most efficient compared to their foreign competitors. The decline in our
wool and mohair industries does not suggest that, left to their own
devices, these industries would be the highest bidders for scarce
resources or contribute most to our balance of trade.




 Page 42                                   GAOjRCED-SO-51   Wool and Mohair   Program
Chapter 5

‘Inclusions and Matters for Consideration by
the Congress

                The National Wool Act of 1954 established a program to provide ~‘ool
Conclusions     and mohair payments to producers. From 19% through 1988, a total of
                nearly $2 billion in payments were made. In addition about $6 million is
                being spent each year to administer the program.

               The act, as amended, established broad and generally unmeasurable
               objectives for the wool program. For example, the program’s objective
               for the shorn wool payments is to encourage the continued domestic pro-
               duction of wool at prices fair to both producers and consumers in a man-
               ner that will ensure a viable domestic wool industry. The act specifies
               that this objective is established as a measure of national security and to
               promote the general economic welfare, a positive balance of trade, and
               the efficient use of the nation’s resources. In addition, according to the
               legislative history of the act, the method used to compute the shorn wool
               payment encourages producers to improve the quality and marketing of
               their wool. implementation of the act also provides for unshorn lamb
               payments to maintain the normal industry practice of marketing lambs
               unshorn. The act contains no explicit objectives for mohair payments,
               yet in recent years these payments have become a major part of the
               overall program costs.

                In 1982, we reported that the wool payments provided under this pro-
                gram had not stopped the continued decline in domestic wool produc-
                tion, which dropped from 283 million pounds in 1955 to 106 million
                pounds in 1980. We also reported, among other things, that (1) the major
                reasons for establishing the program were no longer as important as
                they once were because wool was no longer classified as a strategic com-
                modity for military and emergency purposes, and (2) wool quality had
                not improved as a result of the program.

                The principal findings we reported in 1982 are still valid. Wool produc-
                tion has continued its more than 30-year decline-in        1988, it was at 89
                million pounds-and     wool is still not classified as strategic. Regarding
                improvements in wool quality, industry and U.S. mill representativres
                believe some attributes of wool quality have improved in the 1980s.
                However, trends in wool quality remain largely undocumented.

                From an industry perspective, the wool program payments have done
                some positive things. Specifically, as we recognized in 1982, wool pay-
                ments have provided continued assurance of income to producers, have
                been a stabilizing influence on the sheep and goat industries, and have
                supported a larger sheep- and wool-producing industry than would have
                existed without the program. Furthermore, although we did not address


                Page 43                                   GAO/RCED90-51   Wool and Mohair   Program
                       Chapter 5
                       Conclusions and Matters   for Consideration
                       by the Congress




                       the economic impact of small payments in our 1982 report. it appears
                       from our latest contacts with producers that small payments have
                       helped some producers, including Indians, as the Congress intended.
                       Nonetheless, while the program may be accomplishing some things for
                       the industry, for the economy as a whole, it is unclear how the program
                       could contribute to a positive balance of trade, the general economic
                       welfare, and the efficient use of the nation’s resources. Moreover.
                       despite the program, there has been a more than 30-year slide in wool
                       production, and the subsidy cost for each pound of wool production
                       induced by the program exceeds its market value.

                       In addition to the economic considerations, the broad objectives for wool
                       and the absence of objectives for mohair make it very difficult for us to
                       determine if the program is accomplishing what the Congress intended.
                       We believe it is up to the Congress to weigh the accomplishments against
                       the cost and to decide whether the program should be continued. In
                       making this decision, we believe that, to the extent the Congress decides
                       to continue the program, specific objectives need to be established. Fur-
                       thermore, we believe that all strategic references to wool should be
                       deleted from the act.


Matters for            constraints, the high per-pound subsidy cost, the broad objectives for
Consideration by the   the wool portion of the program, and the absence of objectives for the
Congress               mohair portion, we continue to believe that the Congress should con-
                       sider the need for the wool and mohair program. If the Congress decides
                       to continue the program, we believe the Congress needs to consider, in
                       light of current conditions, what it wants the program’s objectives to be.
                       This could include establishing specific, measurable objectives for both
                       wool and mohair and deleting from the National Wool Act all references
                       to wool as a strategic commodity and as a measure of national security.
                       since these references are no longer applicable.     1


                       In commenting on a draft of this report, USDA agreed with most of our
Agency and Other       findings and stated that the report was well prepared and adequately
Comments and Our       recognized the program’s strengths and weaknesses. Similarly, an eco-
Evaluation             nomics professor from the University of Wyoming, whose study on the
                       sheep and wool industry is cited in chapter 2, stated that the report pro-
                       vided a balanced, accurate appraisal of conditions in the sheep industry
                       and the effects of wool policy.



                        Page 44                                      GAO/RCED-90-51   Wool and Mohair   Program
Chapter 6
Conclusions and Matters   for Consideration
by the Congress




ASIA, on the other hand, disagreed with the overall message of the report
and stated that much of the report supports the conclusion that the pro-
gram has fulfilled the act’s objective of maintaining a viable sheep and
Angora goat industry. Similarly, the Mohair Council of America dis-
agreed with the report message regarding the mohair portion of the pro-
gram, although it stated that the report had been well researched and
compiled. ASIA and the Mohair Council of America both indicated that
the body of the report recognized some of the more positive contribu-
tions of the program; however, they asserted that the report summary
and conclusions lacked balance and were inconsistent with some of the
information contained in the report. Their specific comments and our
evaluation are included at the end of chapters 2, 3, and 4, as applicable.

In response to ASIA’Sand the Mohair Council of America’s overall criti-
cism, we believe the report summary and conclusions are balanced and
consistent with the more detailed information presented in the body of
the report. We particularly highlighted factors such as the high per-
pound subsidy cost of the program, the broad wool objectives, the
absence of specific mohair objectives, the more than 30-year decline in
wool production, and the fact that wool is no longer a strategic material
as it once was, in the report summary and conclusions because we
believe those are the principal factors that the Congress needs to con-
sider in its upcoming debates on the program. Other factors of the pro-
gram, which we discuss in detail in the report, are also provided for the
Congress to consider during its debates.

USDA’S, ASIA’s, and the Mohair Council of America’s specific comments
are included as appendixes.




Page 45                                       GAO/RtXK.NO-61   Wool and Mohair   prO@am
Appendix I

Comments From the U.S. Department
of Agriculture


                                    DEPARTMENT         OF    AORICULTURE
               (@                         OCrlCC   OF THE   SCC~CTA””
                                           W*8wNQtON.       O.C. 101,o
               C


             Hr. John W. Harman
             Director,  Food and Agriculture  Issues
             Resources, Community, and
                Economic Development Division
             United States General Accounting Office
             Washington, D.C. 20540
             Dear Mr. Harman:
             We have reviewed the GAO draft report with respect to the wool
             and mohair price support programs authorized           by the National
             Wool Act of 1954, as amended (the Act), which is entitled,
             'Wool and Mohair Program:          Need for Program Still    in Question-
              (GAO/RCED-90-51).       We agree with most of the findings       in the
             report and feel that it ia well prepared and adequately
             recognizes the strengths         and weaknesses of the program.
             However, we must point out some discrepancies.            On page 30 of
             the draft report it is stated that, 'The act directs            the
             Secretary to support the price of wool at not less than
             60 percent nor more than 110 percent of wool parity            as the
             Secretary determines necessary to encourage wool production
             consistent     with the act's declared policy."       Although this may
             depict the language in the original          1954 Act, it fails     to
             recognize that the Agriculture         and Food Act of 1981 amended
             Section 703 of the Act to provide,         'That for the marketing years
             beginning January 1, 1982, and ending December 31, 1985, the
             support price for shorn wool shall be 77.5 percentum (rounded to
             the nearest full cent) of the amount calculated           according to the
             foregoing     formula."    The Food Security    Act of 1985 extended this
             concept through December 31, 1990. Also, the Omnibus Budget
             Reconciliation      Act of 1967 amended Section 703(b) of the Act to
             provide that -For the marketing years beginning January               1, 1988,
             and ending December 31, 1989, the support price for shorn wool
             shall be 76.4 percent (rounded to the nearest full cent) of the
             amount calculated       according to paragraph (i).'
             In addition,  the statement at the bottom of page 41 of the
             draft report states,    'In addition    to providing    ahorn wool
             payments, the act provides payments for unshorn lambs for the
             stated purpose of maintaining      the normal industry     practice of
             marketing lambs unshorn.'      Section 703(c) of the Act merely
             provides that the support    prices for pulled wool ahall be
             ertablished  at such levela,    in relationship      to the support price
             for shorn wool, as the Secretary determines will maintain normal
             marketing practices   for pulled wool.




                Page 46                                               GAO/RCED-B&51Wool and Mohair Program
          Appendix   I
          Comments From the U.S.Deparhnent
          ofAgriculture




    Mr.     John W. Harman                                                      2
    The use of payments to provide price support with respect to
    unshorn lambs was implemented upon enactment of the Act in order
    to help assure that the practice         of feeding out lambs to
    slaughter     weight and sending them to slaughter      unshorn was
    continued.      We agree that this concept of supporting          unshorn wool
    prices may now be outdated since there are so few wool pullers
    and the fact that so little         wool is pulled.   We agree     with the
    observation     stated in the report that the unshorn lamb payments
    are more difficult      and time-consuming     for the Agricultural
    Stabilization      and Conservation    Service to administer      than are the
    shorn wool payments.       The major reason for this is the tracking
    of the unshorn lambs from owner to owner to assure             that duplicate
    payments are not made on the same unshorn lambs.
    With respect to the section entitled     *Impact on Small Payment
    Recipients",    the draft report should be clarified    to make the
    point that this data should not be construed to indicate       a trend
    in decreased small payments to producers,      but rather that the
    number of small    payments may vary from year to year.
    We would like to express our appreciation       to you and your staff
    for the great deal of thought and work that went into the
    preparation   of this report.   In our opinion,    it reflects  a fair
    appraisal   of the strengths  and weaknesses of the program.
    Sincerely,




    Richard T. Crowder
    Under Secretary for International
      Affairs  and Commodity Programs




L




          Page47                                     GAO/RCED-9061Woo1sndMohsirProgrsm
Appendix II

Comments From Glen Whipple, University
of Wyoming



              Cooperative Extension Service
              college    of AgIicul1ure
              Dcpnmalld~lulal-




                                                                       January     3,   1990




                 John W. Harmon,      Director
                 Food and Agriculture          Issues
                 U.S. General   Accounting         Office
                 Washington,   C.C. iGS48

                 Dear      Mr.     Harmon:

                         I am writing    to comment on the report                entitled     Wool and Mohair      Prooram:
                 Need for Prooram       Still     in Ouest'o             In my opinion      the report   provides      a
                 balanced,     accurate     appraisal      of'cinditions         in the sheep industry        and the
                 effects    of wool policy.           I believe       the reporting       of my research    findings      IS
                 accurate.       I have no suggestions            for    improvement      of the report.

                           Thank      you    for   the   opportunity        to   contribute    to   the   policy   process

                                                                          Sincerely,



                                                                   Lw     Glen    Whipple

                 /cis
Appendix III

Comments From the American Sheep
Industry Association




               January    4, 1990
               John W. Harman
               Director,  Food and Agriculture Issues
               Resources, Community and Economic Development             Division
               U.S. General Accounting Office
               Washington, D.C., 20548
               Dear Mr. Harman:
               On behalf of the American Sheep Industry Association,       we
               appreciate    this opportunity  to make comments relative   to the
               report entitled    Wool    d Mohair Prooram: Need For Proaram Stll&
               In Question (GAO/RCED!iO-51).       The comments we present will be
               relative   to the wool sections of the report.     The Mohair Council
               of America will make separate comments on the mohair sections.
               The American Sheep Industry Association      is a national  federated
               trade association    that represents   over 125,000 U.S. sheep and
               Angora goat producers.
               As stated in the report, the primary objective                of the National
               Wool Act of 1954, as amended, is to "encourage the continued
               domestic production        of wool (and mohair) at prices fair to both
               producers and consumers in a manner which will assure a viable
               domestic (sheep and Angora goat) industry"               that makes a positive
               contribution     to national    security,       the balance of trade and
               efficient     use of our nation's      renewable natural        resources.   An
               economic analysis        aimed at assessing the benefit          of the wool
               payment program should address           itself    to this objective.
               However, neither       the 1982 GAO study nor this recent update does
               this.     This study acknowledges that it "did not attempt to
               independently      determine to what extent the wool program affected
               these broad objectives."
               In both of these studies,      the GAO has chosen to identify
               "objectives"     for study (i.e. level of production,   product
               quality,     and payments to small producers and unshorn lamb) that

                                                       1




                         Page49                                         GAO/RCED-9@6lWoolandMohairProgram
   AppendixIII
   CommentsFromtheAmericanSheep
   Industry Association




provide little    basis for evaluating   the success of the program in
reaching its intended objective.       Yet the conclusions   drawn from
the studies,   relative  to GAO's defined *objectivesa,     are intended
to be used by Congress as a basis for evaluating        the success of
the entire program.
The original       writers    of the Wool Act were not vague in their hope
of what they wanted the wool payment program to achieve.                   For the
decade preceding the enactment of the Wool Act, the American
sheep industry        experienced    the most devastating      reduction   in
sheep inventory        ever. The causes for that reduction          were largely
outside the influence          of the individual     sheep and Angora goat
producer, and the industry           for that matter.     High costs of
production     and an onslaught of low-cost imported wool created the
conditions     that resulted       in the National Wool Act.        As noted in
the report,      the Wool Act was initiated        to provide income
stability    to an otherwise erratic         market in order to maintain a
viable industry.           Even the data presented in the GAO reports
supports that the Wool Act has been successful               in meeting this
objective.
Not only were the original          authors of the Wool Act concerned
about producer income and market stability,             but that concern has
been reiterated       by members of Congress and others through the
discussions     leading up to successive renewals of the Act.              Most
recently,    the conferees on the 1990 Appropriations           for Rural
Development, Agriculture,          and Related Agencies reaffirmed       their
support of these objectives.            In the conference report      (House of
Representatives       Report 101-361) they state:       "The conferees agree
that it is essential        that farm programs be operated in such a way
as to ensure adequate         income to farmers and stability       in the
marketplace.'      Again, the GAO reports show that the Wool Act is
accomplishing      the conferees'     objectives.
While we feel that the areas of study encompassed in the report
are not directly  tied to the failure  or success of the Wool Act,
we feel it appropriate   to comment on the content of the report.
There are inconsistencies       between what is written         in the summary
and conclusions,    and what is in the main body of the report.                The
summary  and conclusion    sections     state that "the principal
findings   in GAO's 1982 report      are still    valid".     Yet the body of
the report documents that wool production            ir Stabilizing,     that
wool quality    has improved , that producers do use wool pricer              (and
wool payments) in their decision procell,            that wool Payment8 are
important to rural economies and to the Navajo Nation,                and that
payments to small "non-commercial"          producers are important and

                                        2




   Page50                                          GAO/RCED-SO-Sl WoolandMohairProgram
    Appendix Ill
    Comments From the American   Sheep
    Industry Association




consistent    with the wishes of Congress and the USDA. These are
all principal     findings that are different from the GAO's 1982
report.
Even the title         of the report,     WOO1 and Mohair Proaram. . Need For
proaram    Still     In Ouestioq      leads the casual observer to a
conclusion       that is not s&stantiated        in the body of the report.


that the GAO has unduly allowed biases to be introduced                 into the
report,   particularly in the summary and conclusions             sections,
which are not founded on the study itself.              For example,
statements like wu the Congress decides to continue the
program", "The average market price of wool in 1988 was m
$1.38 a pound", and 'the funds used to support wool producers
Epuld have been better used to accomplish a more positive                  effect
on the balance of trade, the general economic welfare,                and the
efficient   use of the nation's     resources,       WV        been SD-
pther wavg" introduce    an editorial          bias that may lead the reader
to unfounded conclusions.       The last statement leads one to ask:
In what other ways? No suggestions              are offered.
The payment program encompassed in the Wool Act includes an
incentive    for the improvement of wool quality.       While the
objective    of the Wool Act is not SPeCifiC to the improvement of
wool quality,     there is evidence that wool quality      has improved--
in the technical      characteristics  as well as in the packaging and
preparation.      The report documents observations     from wool buyers,
mills and others that the producers are improving the way that
wool is being prepared and packaged for marketing.           The technical
qualities    of wool have ala0 improved.      Combing trial8    conducted
in 1984 and again in 1909 illustrate       that the fineness of wool is
increasing,     as well as the length.    Colored fibers are
decreasing.      These data are supported by other rtudier       that rhow
that between 1961 and 1998, the volume of wool in the fine grades
 (60'8 and finer)     has increased by over 14 percent.      Recent
shipments of U.S. wool to a large wool textile        company in Wart
Germany document that U.S. wool is equal to or better than
southern hemisphere wool in quality       and other propertier.      The
wool payment program has been succerrful        in improving the quality
of U.S. wool.
It is stated in the report     that 'Wool is        not a Strategic
Material,-  based   on the supporition  that        the Armed Forces*    wool
needs for mobilization    would be reduced         due to the introduction
of a cold weather clothing     system.  The        report does not point out

                                         3




    Page 51                                         GAO/RCEKHO-61Wool and Mohair Program
       Appendix KLI
       CommentsFromthe AmericanSheep
       Industry kssociation




                                                                                            -

that    this   clothing     system has been years in the development and
has    failed    several standards tests.            Questions regarding the
flammability,         safety and durability         of this petroleum based fiber
have been raised.           In addition,     there are some within the Defense
Personnel Support Center (DPSC) who question the advisability                         of
using a petroleum based fiber             garment     as a part      of the
mobilization        requirement.      With the U.S. dependent on oil imports
for 46 percent of its consumption,                the availability        of petroleum
fuels for defense          during a time of emergency is questionable,                let
alone the availability           of petroleum for garments.              Add to this
the volatility         of sea shipments of 011 (and wool for that matter)
from friendly        overseas Countries        in an era of modern high
technology      warfare that can Pinpoint            ship movement with ease,
Even if the clothing           were currently       available,     the Axmed Services
require Congressional           budget appropriations          to be able to make
the purchase.          With the current mood of military               budget
reductions,       the realization       of this petroleum-based           fiber
clothing     system is questionable.
On the other hand, this report supports that the military's
purchase of wool and wool/blend          items for peacetime needs is
substantial      and that if mobilization        requirements    were included
the military      would need an amount of wool equivalent            to over 40
percent of the annual domestic wool production.                 While this
figure is significant,        it becomes even more significant          if the
grade of wool that the military          would need is considered.
Approximately      56 percent of domestic raw wool production             is of
garment quality.        Therefore,   if mobilization       were required
because     of national   emergency, almost all of the domestic garment
quality     wool would be needed     for   military     use, leaving none for
civilian     use.
One question that is repeatedly          raised in the report     is the
"social    cost” of the program.       "Proof" of the coat is
authenticated      by a study conducted by a GAO consultant           during the
1982 study.       This study uses a model to estimate the co8t to the
government for the additional         (marginal) production     that has
resulted    because of the program.         From the beginning,     this study
was recognized by the author as being weak, due to some of the
assumptions that had to be made, and was later criticized                 by the
Economic Research Service of the USDA. Only after the GAO
convinced the ERS that the results            of the study would not
materially     effect the conclusions       of the report   did the ERS
consent to allow the study's        inclusion      in the 1982 GAO report.
In fact,    the results    of the study were the basis lor the
conclusions     about the "social     coat* in the 1982 study and are
being    used as the sole justification         for similar   COncluSionS in

                                            4




       Page52                                            GAO/RCED-SO-51
                                                                      Wool and Mohair Program
    Appendix m
    Comments FromtheAmericanSheep
    Industry Association




this study.     The conclusions    drawn from this    analysis   are not
supportable   in either study,
When making its estimate of the "SOCial cost" of the wool payment
program, the GAO focused entirely       on wool production.       For 1900,
wool payments, according to GAO, "resulted         in an additional     13.6
million   pounds of wool, an 16 percent increase".          The production
of wool is predominantly      from breeding sheep. If wool production
1~ larger because of the program, then the number of breeding
sheep is larger    due to the program.      The other product produced
from these breeding sheep is lamb meat. If the wool payment
program resulted     in more wool production,    it also contributed       to
increased lamb meat production.        The true "social     cost. for the
wool payment program should take into account its impact on all
of the products affected by it.        using the same rationale      used in
the study, i.e.,     18 percent increase and lamb meat accounting          for
75 percent of income to the breeding ewe, it can be shown that
the wool payment program actually       has no 'social    cost' but rather
has a rate of return of almost 62 percent.           That is, for every
dollar paid to the producer through the program, there is one
dollar   and 82 cents of value created.
It is right for Congress to want to have a true and accurate
assessment of the nsocial coat" of the program.        It la just as
appropriate     for Congress to want to have a true and accurate
assessment of the costs that would need to be borne by the
government or by society if the program were discontinued.        This
report documents that the wool payment program is important,        and
in some areas critical,      to the econmiea of rural towns and
cities.     Recent data suggest that sheep production    provides
critical    income for 70 percent of 3,042 counties across the U.S.
The share of sheep income as a percent of total agricultural
income is over 50 percent in hundreds of these rural counties.
The report also identifies      that the Wool Act plays an important
role in the livelihood      of about 10,000 Navajo Nation sheep and
Angora   goat producers.
In a time when state and local governments are near collapse           from
the shock of the decline in the oil, gas, mining, timber and
other industries,  it makes little     sense to question a program
that provides steady, much needed flow of capital         into sagging
rural economies.   Without the Wool Act, these rural economies
would not only feel the effect8      of not receiving   the wool
payments, but the resulting    size   of the sheep indurtry    supporting
their economies would shrink.       A relevant question would be: How



                                       5




   Page53                                        GAO/RCEDgOKlWooland MohairPmgnun
   AppendixIll
   CommentsFromtheAmericanSheep
   Lndustry Association




much would the Federal Government need to spend in these rural
areas to get the same multiplier effect  as is derived from the
Wool Act?
The question of the program's administrative             cost is also raised.
Again, the tone used gives the reader the feeling             that the
administrative       cost is burdensome.     That is not the case. It is
noted in the study that 2/3 of the administrative             cost is for
interest     on the money borrowed by the CCC from the Treasury for
the payment.       It was also noted that in 1968, the CCC received an
advance wool appropriation        for the first     time, which dramatically
reduced the interest        coat.   However, later in the conclusions,
the report notes that *about $6 million           is being spent each year
to administer      the program".     This amount is before the advance
appropriation      was initiated.     Future administration      costs will be
only about one-third        that amount, or $2 million.       Historically,
this relates to only about 5 percent of total payments in low
payment years to about 1 percent of total payments in higher
payment years.
The report implies that if the wool program were discontinued,
there would be a savings to the Federal Government of the
administrative     costs.    The wool program is administered     by the
ASCS offices.      Most of the administrative      coats are associated
with program sign-up at the county and state levels.            The
personnel that sign up wool program participants          are the same
personnel that sign up participants         in other ASCS administered
commodity programs.       Elimination  of the wool program would not
justify    corresponding   elimination   of personnel in county and
state offices.      A false savings would be assumed by the
statements in the report.
A key element of the wool payment program that is not amplified
in the report is the program's design that allows payment to go
up and down baaed on changing market conditions.          The program was
designed to provide stability       to producer incomes by being market
sensitive.       When wool prices are low, program payments provide
the income stability:       and when wool prices strengthen,   program
paymanta go down. The following        provides actual data that
illustrates      the workings of the program,   and underscores the
erratic     nature of the wool market over the three year period.




                                       6




   Page54                                        GAO/RCED9@51Wooland MohairProgmm
        Appendixm
        CommentsFromthe             AmericanSheep
        Industry-Association




Year                      National Ave.                       National Ave.             Total Ave.
                          Market Price                          Payment                Wool Income
________---------------------------------------------------------
                            (per lb.)                               (per lb.)           (per      lb.)

1986                          s    .67                              s 1.11               $ 1.78
1987                               .92                                  -89                    1.81
1988                              1.38                                   .40                   1.78


From 1986 to 1988, the wool payment program provided the much
needed stabilitation  to the producer's income resulting from a
105 percent change in wool prices.
The report notes that this income stabilization           has benefited     the
industry.       It also notes that the program, as initially        designed,
has been restrained       due to Congressional     and agency action.      The
ability    to maintain the original       design of the program was taken
away from the industry's        control.    Economic models suggest that
if the program had been allowed to perform as originally              intended
 (i.e.,   provide up to 110 percent of the target price),         the
decline in sheep inventory        would have stabilized     years ago.     The
Congressional      and agency limitations      imposed on the program need
to be more fully       analyzed when evaluating     its success.
 The study identifies        the general absence of documented evidence
 and clarifies     that much of the report is based on interviews              with
'persons in the industry.           While this is appropriate,     this
 approach does not provide a method of rating the value of the
 respective    opinions.       By mention in the report,      one person's
 comments receive equal weight to another personRar even though
 one may represent a minority          viewpoint.    This presents
 considerable     difficulty      in evaluating   the report.    Additionally,
 the report cites the University           of Wyoming study and the Virginia
 Polytechnic    Institute      study without giving the reader enough
 information    from those reports to allow an aaaeaament of their
 value.     These research reports are presented in the same light                as
 a peraon~s opinion.
The National wool Act of 1954, as amended, has fulfilled    its
objective   of maintaining a viable sheep and Angora goat industry.
Much of what is included in the GAO report supports this




                                                         7




        Page55                                                             GAO/RCRD-9O-51Wool.sndMohairProgram
    Appendix III
    Comments From the American Sheep
    Industry Association




  conclusion.   We respectfully     request that the summary and
  conclusions  sections of the r-aport be rewritten    to reflect these
  findings.   The Wool Act is important to the future of the sheep
  and Angora goat industry      and to rural America.
  Once again,   we appreciate   the opportunity     to respond to this   GAO
  report.




- Bill Schneemann, President
  American Sheep Industry Association




    Page56                                        GAO/RCElMO-Sl Wooland MohairPro@am
Appendix IV

Comments From the Mohair Council of America



                                           MOHAIR           COUNCIL           OF AMERICA


                      January     3, 1990


                      Hr. John W. Narman
                      Director,  Food and Agriculture Issues
                      Resources,  Community and Economic Developent                       Division
                      United States General Accounting Office
                      Washington, D.C. 20548
                      Dear Nr. Haman:
                           Upon reading the Draft Report of the Wool and Nohair Program:
                      Need for Program Still    in Question,  I felt a need to answer some
                      key components pertaining    to the basic characteristics    and
                      properties   of mohair and products thereof.    In addition,   there is
                      also some question of statements made which are conflicting
                      between the rumxaxy and text.
                            The main body of this report has been well researched and
                      compiled.      The problem I have with this report begins with the
                      statement that mohair has no defined basis in the Wool Act.                     The
                      reason mohair was included is exactly as it is defined in the
                      Draft    Report on Page 59 lines 17, 18, and 19, the Wool Products
                      Labeling Act of 1939 and the War Production                 Board labeled mohair
                      as wool and as a war-quality            wool respectively.        During this time
                      there was no need to clarify            different    objectives.      The reason
                      there was no need because the authors of the Wool Act considered
                      Nohair to be Wool. This concept is common all over the world and
                      many places where mohair is sold today the product                  is called
                      moheir-wool.      Products made frcm wool because of their heat
                      retention     and long lasting       qualities    can also be made from mohair
                      and during the 1940's and 1950's everything                 from blankets,    coats,
                      unifoxms,    hats and a long list of other textiles              were used by the
                      military    and civilians       alike were made from mohair.           However, due
                      to the stabilizing        effect of the Wool Act on what otherwise would
                      be a volatile     mohair market       the mohair producers were able to
                      sustain production        and seek other specialty          mukets overseas;
                      however, these products can still              be and are made in the U.S.A..
                            In the Draft Report the cement that Europe is only a
                      processor of nohair is incorrect.      Europe and Asia are the                             two
                      largest consumers of U.S. produced mohair.       This consumption                             of
                      U.S. mohair has resulted    in $306 million  dollars   of revenue                           for
                      U.S. mohair producers frcm 1981 to 1988. This is certainly                                  adding
                      to a positive   balance of trade which was incorrectly      stated                          in the
                      Draft   Report mumary.


                                            "OUR ONLYPURPOSE - TO PROMOTE MOHAIR"
                  Executive office: 516 Central Nshonsi Bank Bldg  P 0. Box 5337       San Angeb. Texas 76902        (9151655 3161
                  promotion office: 499 Swcnth Avrnuo             1606 North Tower    New York. New York 10018       (21217361898
                                            Telex: 271990 MCA USA             FAX:   (915) 655-4761
              L


                             Page57                                                  GAO/RCEDSO51Wool and Mohair Program
     AppendixIV
     Comments FromtheMohairCouncil
     ofAmerica




Mr. Harman
Page 2


      The support price for mohair is calculated        by a formula which
includes a ten year rolling       average price for mohair.       Today this
ten year average includes when mohair was selling           at extremely
high prices,     which I might add was above support price.         The
support price for 1988 of $4.69 and the average mohair price for
 1988 of $1.89 caused a very large payment; however, if mohair
continues    to remain at a low price the support price will decline,
thus causing the mohair incentive        paymant to decline.      Even if
mhair were to rise in price the support price will continue to
fall the next few years due to the low price received for mohair
in 1987 and 1988. It is also important           to note from 1981 to 1988
that there was a significant       increase (62%) in production;      thus,
proving the effectiveness      of the Wool Act to insure production         and
growth during difficult     periods.      It also proved that mohair was
supported below production      coats ($4.95 per pound in 1985) during
the period from 1965 to 1977. The statement that the money used
for the Wool ht could have been spent in other ways should be
completely    deleted.   Conjecture on the part of the GAO for
substitute    programs, which were not spelled out, was not the
intent of this report.
      In awry,       this report refers to a study on page 46 that
points out the efficient        utilization       of the rangelands by sheep
and goats.       This is clear evidence to our industry             that the need
for Sheep and Goats is still           prevalent.      In addition,     facts were
demonstrated to the GAO that mohair alone in ten counties in Texas
represents     from   20 to 55 percent of total          livestock    and livestock
products receipts       without considering        goat sales.      This income,
whether it be from mohair, wool, cotton,              corn or any other
commodity is the basis for all farm programa which is the Survival
Of The Family Farm and Rural DeveloplPent.
     Thank you for allowing       me to assist        in this         review.
                                        Sincerely,


                                         Brian       J.   Hay
                                         Executive         Director




    Page58                                                GAO/RCED-90-51WoolandMohairPro@sm
Appendix V

Major Contributors to This Report


                         John W. Hill, Jr., Associate Director
Resources,               Clifton W. Fowler, Assistant Director
Community, and           Dennis J. Parker, Assignment Manager
                         Henry L. Hoppler, Evaluator
Economic
Development Division,
Washington, D.C.
                         Sherrill H. Johnson, Regional Manager’s Representative
Dallas Regional Office   R. Tyrone Griffis, Evaluator-in-Charge




(022961)                 Page 59                                 GAO,‘UCED9@51Wool and Mohair Program
A..                                                                                            ‘A...




      Requests     for copies    of GAO reports   should   be sent to:

      c’.S. General Accounting        Office
      Post Office Box 6015
      Gaithersburg,  Maryland         20877

      Telephone     202-275-6241

      The first five    copies   of each report    are free. Additional     copies    are
      $2.00 each.

      There    is a 25“U discount    on orders    for 100 or more copies     mailed     to a
      single   address.

      Orders must be prepaid         by cash or by check     or money     order   made
                                                                .
      out to the Superintendent         of Documents.
United States
General Accounting    Office
Washington,   D.C. 20548

Official   Business
Penalty    for Private   Use $300