Wool industry sees new reform option

By Hugh Stringleman

Friday 7th June 2002

Wool industry reform is still in turmoil, despite a positive vote from growers in a Wool Board disestablishment referendum.

The proposed entities, choices and valuations have now become very complex and most growers are not inclined to bother to wade through their options.

Such ennui may result in a poor poll and inconclusive outcome to any Commodity Levies Act proposal to growers by the newly formed Sheepco Incorporated body, just one of more than a dozen proposed successors of the Wool Board.

Sheepco is charged with raising a commodity levy to continue the "industry good" activities such as research and development by the Wool Research Organisation (Wronz), near Christchurch. Its directors were recently appointed.

Critics say there is no way a "yes" vote to the referendum question "Do you want the Wool Board disestablished?" can be interpreted as widespread grower approval for the complicated exit strategy.

"It is just a Clayton's referendum," board critic and Wool Corporation chairman, Phil Verry said.

Wool Corporation has come forward with a formal offer to the Wool Board to buy the non-cash assets, which it plans to use in a vertically integrated industry structure for orderly marketing of strong and medium wools.

Mr Verry, a former board director, has spent four years advancing vertically integrated marketing and claims success for his concept in the orderly sale of the giant Australian wool stockpile.

He also claims New Zealand strong wool growers have lost hundreds of millions of dollars over recent years by not having such a scheme, in contrast to the sale structures for competing fibres, such as cotton and nylon.

During the lengthy debate on the form of Wool Board disestablishment, which began with the McKinsey Report in 1999-2000, New Zealand wool prices have been well below those of nylon, whereas the traditional premium enjoyed by wool was 50% (in US dollars).

Wool Corporation says its proposal will put $300 million of assets into the hands of growers and that supply chain reform will lift prices.

It has offered $60 million to the board for the non-cash assets, and to form a company to hold those assets and issue shares to growers. The board would be free to disperse the cash reserves to growers in the way it is proposing. However, Wool Corporation wants the board to lend $55 million for three years.

"Our proposal makes use of the asset value to form something of longer-term benefit for growers," Mr Verry said.

"The board's wind-up strategy puts short-term cash and shares back to growers, which they would then be free to spend and sell.

"Control of the industry would then pass to non-grower corporates," Mr Verry warned.

Wool Corporation has made a critical analysis of the board's 40-page information document, distributed to growers with the referendum questions last month.

It will make its analysis available to the government and Mr Verry believes the crucial decisions will have to be made by the government.

Although the Wool Board has said it will examine the Wool Corporation alternative, Mr Verry doesn't believe it is competent to do so.

Meanwhile, wool growers have enjoyed better auction prices during the season just ended. Fine and medium wool prices were up 40% on a year ago, and crossbred fleece 10-15%. Lambs wool enjoyed a particularly good selling season, at prices 20% above the previous year.

In the last few weeks auction prices have held but overseas importers are paying much more in US dollars as the New Zealand dollar strengthens.

The prospects for the new season starting in July are mixed but prices should be reasonably steady in $US terms.

"The continuing slow but steady improvement of crossbred prices, bolstered by a couple of sudden jumps during the season, has brought wool prices up to a much more acceptable level," Wool Exporters Council executive manager Nick Nicholson said.

Wool exporters still felt the same "quiet optimism" for wool they had shown throughout the doom and gloom debate that had consumed the wool industry over the past few years.

Despite "all the rhetoric and fancy ideas about new marketing structures for wool that have been promoted by the Wool Board and others" it was the market that ruled and structural issues in New Zealand had "nothing to do with the returns received by growers," he said.

Unfortunately, Woolmark Corporation in Australia has warned of tougher times to come and has forecast a dramatic slump in global demand for wool, with buying activity predicted to drop to the same levels seen during the 1998 Asian economic crisis.

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