The Wool Clip That Had to Wait
A 2,400-head Merino flock in the Great Southern is due to lamb in six weeks. Shearing was booked for the first week of lambing because the contractor's earlier slot fell through. The producer, Priya, has three options: shear now at a premium rate of $9.50 per head, shear at the booked time at $6.80 per head, or delay shearing until after lambing at the standard rate but with a 15% risk of fleece contamination from lambing pens. Last season, unseasonal rain during lambing caused a 4% lamb loss in unshed ewes. Priya's wool broker says fleece value averages $22 per head but drops to $17 if contaminated. Shearing now would also require moving the flock off the paddock being spelled for the lambing paddock, adding two days of mustering labour at $480 per day.
1. Calculate the direct cost difference between shearing now and shearing at the booked time, and identify which non-financial risk dominates the decision.
Read the worked answer
Shear now: 2,400 × $9.50 = $22,800, plus mustering 2 days × $480 = $960, total $23,760.
Booked time: 2,400 × $6.80 = $16,320.
Direct difference: $23,760 − $16,320 = $7,440 more to shear now.
But the booked time falls in the first week of lambing, when ewes are heavily pregnant or lambing and handling stress is highest. The dominant non-financial risk is lambing-time disturbance - mustering and shearing during lambing increases mismothering and lamb loss, and last season's 4% loss in unshed ewes is a warning signal. At 2,400 ewes, a 4% loss is roughly 96 lambs; even at a conservative $80 per lamb that is about $7,680, which already exceeds the $7,440 premium. The judgement call is that the cheapest quote is not the cheapest outcome - shearing now avoids the lambing clash and the contamination risk, and the premium is largely offset by avoided loss.
2. Priya's bank requires a cash-flow forecast before approving an overdraft extension. Explain how the timing of shearing affects her cash position and recommend which option she should present to the bank.
Read the worked answer
Wool income arrives after sale, typically weeks after shearing, so shearing now brings forward both the cost (paid to the contractor within days) and the revenue (wool sale proceeds). Shearing now means paying $23,760 almost immediately but receiving wool income earlier, and at full value of $22 per head rather than the discounted $17 if contaminated.
Revenue comparison:
- Shear now: 2,400 × $22 = $52,800 gross wool income.
- Booked time with contamination risk: 2,400 × $22 = $52,800 if clean, but a 15% contamination risk means expected value = 0.85 × $52,800 + 0.15 × (2,400 × $17) = $44,880 + $6,120 = $51,000.
So shearing now yields about $1,800 more expected wool income and avoids the lambing clash, at the cost of $7,440 extra outlay. Net expected position is roughly $1,800 − $7,440 = −$5,640 before lamb-loss savings, but the lamb-loss saving of about $7,680 swings it positive.
The bank cares about timing of outflows versus inflows. Shearing now front-loads the contractor payment but also front-loads sale proceeds, so the overdraft peak may be shorter and lower. Priya should present the shear-now option with a cash-flow table showing the payment date, expected sale date, and the avoided loss, and note the overdraft is needed only for the gap between contractor payment and wool sale.