Wool industry changes move at fast clip

By JANET TYSON

Wool Board chief executive Mark O'Grady hopes to see his job disappear, the organisation disestablished and $35 million in reserves given to farmers.

His target date is June 30 next year.

O'Grady says the result of the board's grower referendum is "a resounding endorsement" for three key proposals.

Some 6500 growers voted, representing about 45 per cent of the sheep flock - a better turnout than in previous polls.

Ninety-eight per cent supported disestablishing the board, 95 per cent favoured distributing the assets to growers and 65 per cent were for some initial restriction on the sale of those assets.

The move is on to repeal the Wool Board Act and set up a new entity, Wool Equities, to manage the distribution and commercial exploitation of assets.

A separate incorporated society, SheepCo, which will be responsible for research, needs to be formally established and growers need to approve a plan to fund it through a levy.

"It is a tight timeframe, but we aim to be ready even if Parliament isn't," said O'Grady.

The pattern for the 21st-century wool industry was laid out in 2000, in a report from consultants McKinsey and Co.

The report said the Wool Board should be unpicked, and its assets and reserves used to create separate structures to manage research and commercial activities. Those, in turn, should be separated according to whether they deal with fine wools (merino) or strong wools (by far the majority of New Zealand's wool clip).

Some of the proposed structures are fast taking shape.

This week, David Bremner starts work in Wellington as chief executive of Meat and Wool Innovation. His brief is to combine four going concerns into one with a common focus, and to make that one organisation a strong contender in the contest for future levy-payer research funding.

Meat and Wool Innovation is funded equally by meat producers and wool growers. Its constituent parts are the two technology transfer operations, Meat New Zealand R & D and WoolPro, the Economic Service and the national genetics database Sheep Improvement.

Also starting work this week, in Dunedin, is Damian Camp, new chief executive of Ovita. This biotechnology consortium has been established by the Wool Board, Meat New Zealand and AgResearch to capitalise on the intellectual property of the sheep genome.

Its sister organisation, Covita, will have first option to commercialise discoveries.

Ovita and Covita come on the "commercial" side of the divide in wool assets, under the umbrella of Wool Equities.

Out of an estimated $109.1 million in Wool Board reserves as of June last year, transition processes are estimated to cost $17 million. Some of this, including funding for the New Zealand Merino Company, has already been spent.

Wind-up costs to June 30 next year are put at another $21.9 million, leaving $70.2 million for distribution.

A sum of $2.2 million will be allocated to setting up SheepCo. Another $35.9 million will go to growers in the form of redeemable preference shares, which can be converted to ordinary shares in the board's commercial companies or cashed up.

Just over $32 million is set aside for Wool Equities, which will hold grower interests in Ovita, Covita and the consumer-focused Wool Interiors, as well as a $1.6 million interest in the New Zealand Merino Company. Most of these funds are earmarked for Ovita, provided it meets required targets.

O'Grady said the proposed structure "achieves all the underlying principles of the McKinsey Report. We've done all the things they recommended except strong wools."

In other words, everything except establishing an integrated structure for buying and marketing most of the wool clip which, it could be argued, was one of the main reasons growers voted for the McKinsey recommendations in the first place.

The initiative is now with rural service company Wrightson, which handles a much greater share of the wool clip than any other competitor. One of the wool industry's most experienced international marketers, John Grainger, has left the Wool Board and since January has worked for Wrightson as international market development manager.

Wrightson saw the McKinsey pattern for integrated marketing companies as being in line with its own aspirations for a "new direction which would create better opportunities for growers".

Wrightson general manager for wool Richard Wakelin said the company believed it could "create value more efficiently, and more effectively, by enhancing wool's competitiveness and creating enduring relationships between the producer, processor and the market".

This has proved to be so in the case of the niche product fine wool. A year ago, the New Zealand Merino Company was established, 65 per cent owned by growers and 35 per cent by Wrightson. Just before the end of its first full financial year, chief executive John Brakenridge said the venture had "met and should exceed our targets", including securing 72 per cent by value of the merino market share.

But there is no parallel strong wools company to report on.

Wakelin said that "unfortunately, we couldn't achieve a result" with the Wool Board, despite the involvement of high-profile grower advocates such as Sir Brian Lochore.

A subsequent attempt at a strategic alliance, OneWool, with industry heavyweights Feltex, the East Coast Wool Co-operative and the Federation of Maori Authorities ended this year.

Wakelin said Wrightson had not given up its belief that a better marketing solution could be found for non-merino wools, but the approach would have to be a hard-nosed commercial one.

"We still believe the principles of our Integrated Fibre Management Strategy, launched in the late 1990s, can match the needs of growers and processors and form the basis of a new commercial company."

Wakelin is reluctant to be more specific or give any expected time for an announcement.

"As an indication of how seriously we are taking this, we have appointed Mervyn English as interim CEO, and he is developing a business case."

English, an older brother of National Party leader Bill, has long experience in public sector structures and change processes, most recently in the energy sector.

"OneWool started as a journey of discovery, and we're moving forward delicately," said Wakelin. "We need a vehicle that can take the fundamental philosophy of joining growers and processors together, and we've come to the conclusion it has to be something completely new.

"We're going it alone. We're investing in our own research - some $6 million already. It's immaterial to us what happens to the Wool Board."

Meanwhile, primary production select committee chairman Damien O'Connor said he was concerned "the Wool Board is setting up a number of structures funded with wool growers' money that could be flicked off into private hands for a song".

He said that could leave the original investors, the wool growers, "selling raw material to a cost-plus industry player, just as they do now, minus their reserves."

But O'Grady felt the two-year restriction on selling or trading shares, except between growers or their organisations, should provide enough time for fair value to be established.

"Some suggested a complete ban on share trading, but we felt that would make the shares worthless."

The Board is armed with results of its recent Grower Referendum, "a resounding endorsement", says O'Grady, for three key proposals. Some 6500 growers voted, representing about 45 per cent of the sheep flock - a better turnout than in previous polls.

Among those who voted, 98 per cent supported disestablishing the Board, 95 per cent were in favour of distributing the assets to growers, and 65 per cent were for some initial restriction on the sale of those assets.

The move is on to repeal the Wool Board Act and set up the new entity, Wool Equities, which will manage the distribution and commercial exploitation of assets. The separate incorporated society Sheepco, which will be responsible for industry good research, needs to be formally established, and growers need to approve a plan to fund it through a levy.

"It is a tight timeframe, but we aim to be ready even if parliament isn't," says O'Grady.

The pattern for the 21st century wool industry was laid out in 2000, in a report from consultants McKinsey and Co. The report said the Wool Board should be unpicked, and the resultant assets and reserves used to create separate structures to manage research and commercial activities. Those, in turn, should be separated according to whether they deal with fine wools (Merino) or strong wools (by far the majority of New Zealand's wool clip).

Some of the proposed structures are fast taking shape. This week, David Bremner starts work in Wellington as CEO of Meat and Wool Innovation. His brief is to combine four going concerns into one with a common focus, and to make that one organisation a strong contender in the contest for future levy-payer research funding.

Meat and Wool Innovation is equally funded by meat producers and wool growers. Its constituent parts are the two technology transfer operations - Meat New Zealand R & D and WoolPro - the Economic Service, and the national genetics database Sheep Improvement Ltd (SIL).

Also starting work this week, in Dunedin, is Damian Camp, new chief executive of Ovita. This biotechnology consortium has been established by the Wool Board, Meat New Zealand and AgResearch, to capitalise on the intellectual property of the sheep genome. Its sister organisation Covita will have first option to commercialise discoveries.

Ovita and Covita come on the "commercial" side of the divide in wool assets, under the umbrella of Wool Equities.

Out of an estimated $109.1 million in Wool Board reserves as of June last year, transition processes are estimated to cost $17 million. Some of this, including funding for the New Zealand Merino Company, has already been spent. Wind-up costs to June 30 next year are put at another $21.9 million, leaving $70.2 million for distribution.

$2.2 million will be allocated to set-up costs of SheepCo and through it to Meat and Wool Innovation.

Another $35.9 million goes to growers, in the form of redeemable preference shares, which can be converted to ordinary shares in the Board's commercial companies, or cashed up.

Just over $32 million is set aside for Wool Equities Ltd, which will hold grower interests in Ovita, Covita, and the consumer-focussed Wool Interiors, as well as $1.6 million interest in The New Zealand Merino Company Ltd. The majority of these funds are earmarked for Ovita, provided it meets required targets.

O'Grady says the proposed structure "achieves all the underlying principles of the McKinsey Report, We've done all the things they recommended except Strong Wools," he says.

In other words, everything except establishing an integrated structure for the procurement and marketing of the vast majority of the wool clip which, it could be argued, was one of the main reasons growers voted for the McKinsey recommendations in the first place.

The initiative is now with the rural service company Wrightson, which handles a much greater share of the total wool clip than any other competitor. One of the wool industry's most experienced international marketers, John Grainger, has left the Wool Board and since January has been working for Wrightson as its International Market Development Manager.

Wrightson saw the McKinsey pattern for integrated marketing companies as being in line with its own aspirations for a "new direction which would create better opportunities for growers."

Wrightson General Manager for Wool, Richard Wakelin, says "We believed we could create value more efficiently, and more effectively, by enhancing wool's competitiveness and creating enduring relationships between the producer, processor and the market."

In the case of the niche product fine wool, this has proved to be so. A year ago, the New Zealand Merino Company was established, 65 per cent owned by growers and 35 per cent by Wrightson. Just ahead of the end of its first full financial year, its chief executive John Brakenridge says the venture has "met and should exceed our targets", including securing 72 per cent by value of the merino market share.

But there is no parallel strong wools company to report on. As Richard Wakelin puts it, "unfortunately, we couldn't achieve a result", working with the Wool Board, despite the involvement of high profile grower advocates like Sir Brian Lochore. A subsequent attempt at a strategic alliance, OneWool, without the Board but with industry heavyweights Feltex, the East Coast Wool Co-operative and the Federation of Maori Authorities, halted earlier this year.

Richard Wakelin says Wrightson has not given up its belief that a better marketing solution can be found for non-merino wools, but the approach will have to be a hard-nosed commercial one.

"We still believe the principles of our Integrated Fibre Management Strategy, launched in the late 1990s, can match the needs of growers and processors and form the basis of a new commercial company", says Wakelin. He is reluctant to be more specific or to give any expected time for an announcement.

"As an indication of how seriously we are taking this, we have appointed Mervyn English as interim CEO, and he is developing a business case." English, an older brother of National party leader Bill, has long experience in public sector structures and change processes, most recently in the energy sector.

"OneWool started as a journey of discovery, and were moving forward delicately. We need a vehicle that can take the fundamental philosophy of joining growers and processors together, and we've come to the conclusion it has to be something completely new. If you try to resurrect a concept within the status quo, you end up with a reorganisation that goes nowhere.

"We're going it alone, we're investing in our own research some $6 million already. It's immaterial to us what happens to the Wool Board."

Meanwhile, Primary Production Select Committee chairman Damien O'Connor says he is concerned that "the Wool Board is setting up a number of structures funded with wool growers' money that could be flicked off into private hands for a song, leaving the original investors, the wool growers, selling raw material to a cost plus industry player, just as they do now, minus their reserves."

But O'Grady says he feels the two-year restriction on selling or trading shares, except between growers or their organisations, should provide enough time for fair value to be established.

"Some suggested a complete ban on share trading, but we felt that would make the shares worthless."