Revamp in wind for woolgrowing

By IAN FARRANT

In the days when New Zealand was said to live off the sheep's back and wool was so valuable it was picked off barbed wire, it must have seemed inconceivable that wool could decline in demand and profitability.

Yet for most of the last 40 years wool has been in decline, primarily because of the rise in popularity and quality of synthetics, and a strong challenge from the cotton industry, especially in apparel.

Consider the following facts: wool provides only 3 per cent of the world's fibre; New Zealand sheep numbers have fallen from 75 million to 45 million; there are now just 70,000 farmers in New Zealand, or a little less than 5 per cent of the population; and Merino growers, who contribute just 4 per cent of the total annual clip, account for 15 per cent of the industry's earnings.

Clearly, the industry's difficulties are not capable of any single or simple solution.

Yet our assumption for the last century, that nothing beats wool for quality and durability and that New Zealand wool is better than that of other countries, may not be off-beam.

Despite our strong arguments about the superior qualities of wool carpets - they do not burn readily and do not emit poisonous gasses once on fire- international hotel chains and commercial property developers continue to lay thousands of square kilometres of synthetic carpet each year.

The top-end apparel producers continue to use our fine wools, but the Australians are an ever-present competitive threat and benefit from a fine-wool industry many times bigger than our own.

In the meantime, mid-micron crossbred wools are confronted with a major international decline in demand illustrated by the unexpected slump in demand for Shetland jumpers.

Clearly the time has come for something to be done to identify where the wool industry needs to go and what changes in structure and operation are required. It is preferable to do so in a unified and cohesive fashion with the support of growers and the downstream industry and customers.

As a result of pressure from growers and recognition by the Wool Board that a review was needed, we are now nearing the end of an investigation of the industry by international management-consulting group McKinsey and Co.

My organisation, the Independent Stakeholders' Group, was set up to monitor the process with the board and growers, and to ensure that the process and the findings are seen as being independently achieved.

The main aim of the Wool Industry Development Plan is to deliver a sustainable improvement in grower profitability in the "wool value chain," or between growers and the users of products manufactured from New Zealand wool.

McKinsey's terms of reference were to analyse the current industry situation, review the initiatives already in place and develop a plan to improve grower profitability.

In developing the plan, McKinsey was asked how the value of wool could be improved and how overall costs could be reduced.

After developing the agreed strategy, the appropriate industry structures will be identified.

This is why the process for the McKinsey study has been carefully designed and is being, some would say, excessively controlled by the stakeholders. We have to ensure that this report has every chance of getting further below the surface of the industry than any other, and therefore has a superior chance of coming up with some definitive and well-founded recommendations.

For this reasons we have been anxious not to allow the study to be hijacked by any particular quick-fix or jingoistic solutions, nor for it to be overly influenced by any particularly group.

The wool-growing industry contains numerous subgroups, defined both by sheep types and the micron measurement of wool thickness.

The fine-wool group (less than 21 microns), comprising mainly the Merino growers, is involved in a segment that has entirely its own set of dynamics.

The recent publicity about the bale of fine wool from the Southern Alps fetching $1200 a kilogram shows the differences, and the fact that Merino growers have relatively few problems and have established their own brand and marketing structure that is the envy of most wool-growing groups.

Similarly, the coarse-wool growers (32 microns and up) are finding demand for their product is surprisingly strong for specific types of carpet, rugs and industrial uses.

The real difficulty lies in the broad mid-micron (22-30 microns) group, which has been the area occupied by most farmers and where the compromise between wool income and meat income has traditionally been the happiest.

However, we are now finding, as the study begins to bring up further interesting statistics, that profitability in the industry is strongest at the fine and coarse ends.

Fine-wool farmers expect to derive some 27 per cent of their profits from sheepmeat and stock sales, with the wool providing about 67 per cent.

At the coarse end the proportions are reversed, with meat providing 65 per cent of profit and wool supplying the balance of 35 per cent.

But mid-micron growers are finding that while the split is more like 48 per cent meat and 37 per cent wool, the price premium for the wool is not nearly as significant and therefore profitability is poorer overall.

The traditional farmer's view is that the fault lies with excessive margins in the production chain once the wool passes the farm gate.

While there is merit in this argument, I think it is vital that the McKinsey study looks at the entire industry from a profitability and growth perspective to ensure that the traditional accusations of fault are seen as manifestations of a problem rather than solutions.

It is likely that McKinsey will look at potential new industry structures and ownership options, including the extent to which the industry "deregulates" itself and introduces greater commercial ownership and governance.

At the one end we have the potential for a fully commercialised industry with farmers investing equity in an organisation that treads a strong commercial path through three or four chains of the industry, including sale, processing and international market presentation. At the other we have the potential for a single-desk recommendation.

Early next month, the stakeholders' group and the board will receive the preliminary results of the study and have the opportunity to provide feedback. From that stage on the stakeholders will weigh up the options presented on the basis of the original brief, being that any recommendations need to be "capable of implementation."

If the recommendations cannot pass that test, we will all be the poorer.

In fact the study is really just part of the bigger picture for the sheep industry, and it is important that woolgrowing considerations are assessed and measured within the context of the dual cropping of meat and wool. It may be that arising from the McKinsey study we see an entirely new sheep industry structure.