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Diversity and Innovationfor Australian Wool

Report of the Wool Industry Future Directions Task Force

Volume 1: Executive Summary, Conclusionsand Recommendations

June 1999

ChairmanHon Ian McLachlan AO

Task Force MembersHarold Clough AO OBE

Perry GunnerMark Johnson

Julia KingDanny Samson

National Library of Australia Cataloguing-in-Publication entry

Australian Wool Industry Taskforce.

Name to be chosen

BibliographyISBN 0 1234 5678 9.

1.

I. II. title

338.43636314509945

Designed and Produced by Design Print Solutions Pty Ltd

Cover PhotosThe Taskforce would like to thank the following for use of their images;

Advertiser Newspapers Ltd.Andrew McLeod (ADELAIDE CROWS AFL Premiers’ SPORTWOOL™ Jumper)Australian Wool Testing Authority Ltd.Bioclip Pty. Ltd.CSIRO Textile and Fibre TechnologyElders Ltd.G. H. Michell & Sons (Aust) Pty. Ltd.Spinelli Knitting Pty. Ltd.

Chairman:Hon Ian McLachlan AO

Task Force Members:Harold Clough AO OBEPerry GunnerMark JohnsonJulia KingDanny Samson

Level 641 Currie Street,Adelaide SA 5000Telephone:+61 8 8221 6211Facsimile: +61 8 8221 6144email: [email protected]

Th e Wo o l Ta s k f o r c eAustralian Wool IndustryFuture Directions Task Force

30 June 1999

Hon Mark Vaile MPMinister for Agriculture, Fisheries and ForestryParliament HouseCANBERRA ACT 2601

Dear Minister

The Wool Industry Future Directions Task Force has pleasure in presenting its report.

The difficulties facing all businesses involved in the production and processing of wool, both in Australia andoverseas, are well known. For many woolgrowers, prices have been too low to keep them profitable or inbusiness. Productivity growth of many woolgrowing businesses has been poor, and some are too small to beeconomic.

For some these recommendations may seem to be very tough, but the Task Force felt it was very important tospell out the options quite clearly. The first 9 recommendations address wool growers business problems insome detail.

The Task Force has no magic answers or overnight miracles, but does see many opportunities for individualwoolgrowers to take initiatives which may materially improve their economic position.

The Task Force has also recommended a new innovation and implementation organisation, a commercialcompany, which, from 1 July 2000, would take over from AWRAP and The Woolmark Company. We havedesignated this company “Australian Wool Services”, although its actual name will be determined by thecompany itself. It would have a simple mission statement: “to commission wool innovation and tocommercialise the results, for the maximum benefit of members/shareholders”. Woolgrowers would pay adeclining levy and receive shares in Australian Wool Services.

They would receive these shares on the basis of 1 share per $100 of grower levy paid between the 1 July 1999and 30 June 2000.

The board of the company would prepare a prospectus or business plan for the company’s future operationwhich would be the basis of a shareholder vote no later than 31 March 2001. The vote would determinewhether the company continued, converted to a much smaller R&D only organisation, was completelyprivatised (no compulsory levies at all) or was wound up.

Because of the tight timetable proposed, it is imperative that the new board be appointed without delay – by1 January 2000. This may precede the legislation for Australian Wool Serices itself, so the board should, as aninterim arrangement, become the AWRAP board.

Two other recommendations involving the Government are:

• legislation to create a “truth in labelling” requirement for all Australian wool; and

• an allocation of funds from the textile, clothing and footwear Strategic Investment Program, to optimisefuture development of innovative products derived from wool, fully consistent with the objectivesenunciated by the Government.

I believe there has been ample opportunity for consultation and the expression of woolgrower views duringthe Task Force process.

In commending the report to you, I strongly urge that early decisions be made on the report’srecommendations, and that it not languish for a further extended consultation period. The need for quickresponses to the problems facing woolgrowers is obvious.

If these recommendations are carried out by Government, by the new board, but more importantly by thegrowers themselves, more wool businesses will have a profitable future.

Yours sincerely

Ian McLachlan AOChairman

FOREWORD iii

EXECUTIVE SUMMARY

1. Which Way for Wool? 1

2. The State of Wool Demand 2

3. Woolgrower Profitability 3

4. The Wool Pipeline 4

5. The Conduct of R&D and Promotion 5

CONCLUSIONS AND RECOMMENDATIONS

1. Responsibilities of Woolgrowers Versus a Collective Organisation 7

2. Individual Woolgrowing Businesses Must Make Crucial Decisions, and Make Them Now 9

3. Enhancing Woolgrower Profitability: Increasing Revenue 11

4. Enhancing Woolgrower Profitability: Reducing Costs 13

5. Facilitating Adjustment 14

6. Truth in Labelling for Australian Wool 15

7. Improving Woolgrower/Customer Communication 17

8. New Systems of Wool Selling 18

9. Australian Wool Testing Authority 19

10.Reserve Price Schemes 20

11.Trade Policy and Wool 21

12.The Role of Government 22

13.Value Adding 23

14.Promotion 24

15.Research and Development 25

16.Australian Wool Services 27

Contents

i

There are no

magic puddingsand there are

no messiahs...

iii

This report is essentially written for Australianwoolgrowers. It came about because, inNovember 1998, woolgrowers passed a vote ofno confidence in the organisation (theAustralian Wool Research and PromotionOrganisation, AWRAP) to which they paysubstantial compulsory levies, and which existsto manage research and development (R&D)and promotion on their behalf. The Minister,as required under the legislation, thendismissed the board and established the WoolIndustry Future Directions Task Force.

The terms of reference required the TaskForce to address five questions:

• what affects the competitiveness of wool asa textile fibre?;

• how can the performance and profitabilityof wool businesses be improved, both athome and overseas?;

• how can the performance of Australianwool and wool products in internationaltextile markets be improved?;

• are there better ways to fund andadminister wool research and promotion?;and

• how appropriate are the existinginstitutional and statutory arrangements?

The Task Force saw its fundamental objectiveas ensuring that wool businesses – those whoare or wish to become business oriented,professional woolgrowers – are given thebest opportunity possible to be profitable on asustainable basis.

The report is not written to let people downgently. The problems facing woolgrowers arevery serious and they affect thousands offamilies and businesses throughout Australia.The Task Force has tried to tell the story as itsees it, so that realities can be confronted.

The Task Force comprised a group of leadingprofessionals, mainly – and intentionally –drawn from a non-wool background. Itreceived input from anyone willing to put pento paper, use the Internet, come to a meeting,or pick up a telephone. Over 650 formalsubmissions were received. The Task Forceexpresses its sincere thanks to all those people

– and for the goodwill with which manyconstructive proposals were put forward. TheTask Force interviewed over 260 people inAustralia and 120 people overseas.

There are no magic puddings and there areno messiahs.

But there are a number of crucial messages tobe heeded, and future directions to be taken.Most require absolutely vital decisions bywoolgrowers themselves. Some involvechanges which Governments should make.

The central message for woolgrowers andother wool businesses is this: “there isnobody out there to save you; but there areways you can save yourself – if you aresufficiently determined, resourceful,flexible and innovative”.

The Task Force has endeavoured to putwoolgrowers in charge of their businesses andof the new collective institution (via shares)which it is recommending be established. Therecommendations have been written in such away that diversity, innovation, theimplementation of innovation, and customerservicing are the major thrusts.

The Task Force considers that if these activitiesare done well, then those that do them wellcan look forward to success, in wool as in anyother field of endeavour.

Foreword

There needs to be a

fundamental culturaland

attitudinal shift among w oolgr owers...

1

To paraphrase a well known advertisement,“wools ain’t wools”. There really is no suchthing as “the wool industry” and no singlesolution that suits everyone. Rather, there is awide diversity of businesses involved inproducing or processing wool, with differingobjectives, handling quite different productsfor quite different markets and end uses.Some are currently operating profitably, othersare unprofitable, have been so for some timeand are struggling to survive. Others againhave already lost that struggle and have goneout of wool – or out of business.

So, while it does not apply to all, many woolbusinesses in all parts of the supply chain arefacing crucial decisions about their future.They can confront the challenges and turnthem to advantage, or make their minds upnow to move on. The Task Force report isdesigned to help wool businesses in makingthose decisions.

The Task Force considers there are fourthreshold issues which underpin the specificconclusions and recommendations whichfollow.

First, there needs to be a fundamentalcultural and attitudinal shift amongwoolgrowers. Woolgrowers have delegatedresponsibility for key activities – R&D,promotion and at times marketing/marketsupport – to centralised agencies. Theseagencies have been expected to solve each andevery problem and woolgrowers have tended tolook for someone to blame when things havegone wrong. Many decisions have beenpoliticised. A collective mind-set still persists inmany of the submissions received by the Task Force.

It must change. Woolgrowers individually musttake responsibility for their business and fortheir fibre. The mind-set must shift from “theyor them” to “I/me “or” we/us”.

Second, the diversity in wool should becelebrated, not lamented. For too long, thefocus has been on “the wool industry” andwhat “it” should do. This “one size fits all”attitude has worked against successful

outcomes. It has led to consensus decisionmaking, politically not commercially drivenagendas, lowest common denominatoroutcomes, interminable delays in progressingreform, and generally an FAQ (fair averagequality) culture and, much of the time, an FAQproduct. When the collective decisions havebeen wrong – as with the reserve price scheme(RPS) – the consequences have beencatastrophic for everyone.

Third, wool’s future success depends criticallyon continual innovation – and its quickimplementation. Today’s market place isdynamic and constantly evolving. Today’sconsumers face a vast array of choices, demandever higher quality, and regularly seek newangles on products and styles. If woolbusinesses are to survive, they need to beresponsive to these swings of fashion – quicklycorrecting existing deficiencies, anddeveloping new ways of satisfying consumers.Wool’s competitiveness has been declining; itmust improve.

Fourth, government intervention in thecommercial market place should only be inresponse to a demonstrated “market failure”.For the most part, wool businesses, from farmto retail, operate in a competitive open market.The market place facilitates entrepreneurialactivity and is clinical in rewarding success andpenalising poor decisions. Sometimes marketsdo fail, as when individuals or groups judgethey cannot capture sufficient benefits forthemselves to justify an investment. Wheremarket failure can be clearly established, someform of compulsory action may be justified.Market failure is integral to theCommonwealth Government’s principles forcompulsory industry taxes and levies. Even so,woolgrowers should be able to vote on what isdone.

If these four threshold conclusions can befollowed, the Task Force considers thatprofessional woolgrowing and other woolbusinesses can have a sound future.

Executive Summary

1. Which Way for Wool?

2

In recent years, weak demand has createdunprofitability for a majority of wool-dependent businesses. There are still highstocks of some types of wool at various stages inthe pipeline: on farm, in brokers’ stores, theremaining RPS stockpile, tops, yarn and fabric.These stocks add to price pressures, but themain reason why prices are depressed is thatdemand is weak, in part because demandpatterns have shifted. Many woolgrowers donot fully appreciate what has occurred.

Cyclical

When economies are not growing – forexample, following the Asian financial crisis –consumers lack confidence to buy garments.When economic growth recovers, a pick up inwool demand can be expected, as indicated byrecent consumption trends in the UnitedStates.

Structural

Deeper-seated changes affect wool demand,such as reductions in clothing expenditure, orcompetition for the consumer’s dollar fromcomputers or various forms of entertainment.The military’s demand for wool, onceimportant, is not currently a significant factor.Air conditioning means lighter weight clothingand thus less wool consumed per garment.

Consumer attitudes and wool fibredeficiencies

Wool’s competitive position continues toweaken. Some traditional attributes are lesswell recognised by today’s consumers – who, inany case, mainly purchase products, styles andcolours or brands, rather than a specific fibre.To some consumers, wool is perceived as oldfashioned – especially in an era of more casualclothing. In many of its markets, wool is nolonger “special”.

Wool demand has not been helped by fibredeficiencies – especially the presence ofcontaminating or coarse wool fibres which are“prickly” against the skin, or difficulties inmachine washability and garment care.

Reserve Price Scheme legacy

The direct and indirect effects of the 1991collapse of the RPS continue to haunt wooltextile businesses and woolgrowers. Whateverthe rights or wrongs of what occurred, the factremains that the RPS caused catastrophicdamage to wool businesses all along the chain.

Artificial fibre competition

Wool’s competitors, especially artificial fibres,continue to make significant improvements inquality, performance and price, in part byimitating the attributes of natural fibres,making life harder for wool. The latest areShingosen (ultrafine polyester fibres designedto mimic all of the benefits of wool) and thereis also some repackaging (and sometimesrenaming) of older artificial fibres.

It is one of life’s paradoxes that today’sconsumers, environmentally sensitive as neverbefore, continue to regard fibres derived fromthe oil industry with apparent equanimity.

Conclusion

The conclusion which the Task Force drawsfrom all this is unambiguous: the world doesnot need wool. Notwithstanding this reality thechallenge is to make wool a desired andpreferred fibre. It is a daunting challenge butby no means a forlorn one.

Executive Summary

2. The State of Wool Demand

3

Australian woolgrowers are aware of thesedifficulties, although the severity of the shift inwool demand is not fully appreciated byeveryone. Already, many have voted with theirfeet in response to unprofitability resultingfrom low prices relative to costs.

Some have adjusted into alternative enterpriseswhich appear to offer sounder prospects. Thisis as it should be, and forms part of thecontinuing evolution of Australian agricultureas it strives for viability in the face of globalcompetitive pressures. Others have leftagricultural production altogether.

The number of sheep in Australia has declinedby over 50 million – or around 30 percent –since 1991, and the number of woolgrowers by20 percent over the same period.

The brutal reality is that too many woolgrowershave been too unproductive for too long. On-farm productivity of woolgrowing comparespoorly with a number of other agriculturalenterprises, such as grain, dairy, cotton andgrapes, which have chalked up impressiveimprovements in recent years.

The reasons why woolgrower productivity haslagged are complex. However, one contributorwas the RPS; it induced a false sense of securityamong woolgrowers. Believing that pricestability had been assured, woolgrowersresponded to a market message of “increasewool production” – not “become moreefficient”, or “increase productivity”, or“improve quality”, or “get closer to thecustomer”, “or eliminate deficiencies in thefibre”.

That era has passed forever, and woolgrowersmust recognise they have considerable catchingup to do – and not much time in which to do it.

A related factor is that many woolgrowersremain optimistic that prices will recover toprofitable levels “because we have seen similarcycles before”. Prices may recover or they maynot. The long term trend of real wool prices isdown. Some markets seem to have changedpermanently. If complacent optimism was everjustified in the past, it is not now.

It is clear to the Task Force that a significantnumber of woolgrowers will struggle to beprofitable even at wool prices somewhat higherthan at present. The Task Force is notprescriptive in the sense of suggesting howmany may cease woolgrowing over what timeperiod. Circumstances differ, and people’sobjectives differ. Rather, the Task Forceconsiders it should lay out the facts as it seesthem, so that individual woolgrowingbusinesses – and the families that depend onthem – can make their own decisions.

The average woolgrowing business owns lessthan 3000 sheep. The smallest 30 percentproduce a mere 5 percent of total woolproduction; the smallest 63 percent, just 25percent. These figures underscore the extentof adjustment ahead, as 3000 sheep are notsufficient for a viable enterprise in theoverwhelming majority of situations.

At the other end of the scale, the largest 10percent of woolgrowing businesses producenearly 40 percent of the national clip. Moreimportant than sheer size is performance. The“top” 20 percent of woolgrowers in terms ofperformance (which are not necessarily thelargest) earn rates of return three times theaverage. These woolgrowers continue to beprofitable even at current low prices.

At the wool production level, this report isdirected at business oriented “professionalwoolgrowers” – in other words, businesses(whether specialist wool-only enterprises ormixed farming enterprises) that are seriousabout long term profitability from wool, ratherthan businesses in which wool is a side line,where the sheep are used for weed control oncereal farms, or prime lamb production.

As the supply “factories” to the global wooltextile industry, the principal role ofwoolgrowing businesses must be to present aconsistent, quality fibre to the wool textilechain at a competitive price.

3. Woolgrower Profitability

4

Wool is a more expensive fibre than itsprincipal competitors, cotton and polyester,the price ratio being about 3:1. It is also moreexpensive to process, again about 3:1 until theyarn stage. Some of the reasons are intrinsic(for example the nature of the respectiveproduction “factories” or the need for woolscouring), others reflect the technologycurrently employed (for instance slower ringspinning for wool, compared with rotor orroller jet spinning for cotton or polyester),while others reflect historical practices whichmay no longer be appropriate (for examplecleaning up uneccessary contamination, orexpensive price discovery mechanisms).

At the same time, costs need not be everything.Price premiums can be sustained in the face ofcost disadvantages if, and only if, qualityattributes are relevant and sufficiently wellrecognised by consumers. But quality andprice premiums are rarely permanent. Inparticular, the potential threat to wool posedby ultrafine fibres and fabrics must be clearlyunderstood by woolgrowers.

There is an urgent need to eliminateunnecessary costs from the wool textilepipeline, starting with the impact ofcontamination which could be costing as muchas $100 million annually. In addition, a morecompetitive and pro-innovation environmentwill be conducive to further cost reductionsthroughout the processing chain, especiallyinvolving the transport, handling and selling ofgreasy wool in Australia.

Executive Summary

4. The Wool Pipeline

5

For many years woolgrowers have accepted theneed to raise funds via compulsory levy for thecollective conduct of R&D and promotion.

Since 1936-37, when these levies commenced,woolgrowers have contributed $309 million forR&D and $2 billion for promotion – or $4.7billion in total if measured in today’s dollarvalues. The Commonwealth Government hascontributed a further $342 million for R&Dand $618 million for promotion – or $2.8billion in today’s dollars. (An additional $3.3billion – or $5.2 billion in today’s dollars –were contributed by woolgrowers formarketing support, as part of the RPS). Thetotal of these contributions (in today’s dollars)is a staggering $12.6 billion.

On the R&D side, the justification forcompulsory levies has been “market failure”:that is, in the absence of compulsory levies,insufficient voluntary R&D would have beenconducted from the viewpoint of woolgrowersand processors overall. Promotion wasconsidered essential to ensure consumerawareness of wool products and theirattributes, encourage key processors anddecision makers to choose wool in theirproduct ranges, convey the results of wool fibreresearch to potential users, and combat theactivities of huge corporate manufacturers ofartificial fibres.

Government contributions have been made forseveral reasons – a desire to reap a generalcommunity benefit from research, arecognition of wool’s disadvantages resultingfrom manufacturing industry protection (theso-called “tariff compensation” argument) and,in the case of promotion assistance, simply theoutcome of the political process.

The centre-piece of wool promotion since thelate 1960s has been the Woolmark symbolwhich, backed by extensive advertising,achieved widespread consumer recognition,especially in an era before the dominance ofmajor corporate brands.

Notwithstanding these massive financialcommitments, the competitiveness of the woolfibre has fallen significantly. A number ofprevious reports into wool promotion havequeried its effectiveness, when measuredagainst the appropriate benchmark ofwoolgrower benefits relative to the outlays.This particularly applies to generic consumeradvertising.

Concern over the effectiveness – and evenappropriateness – of compulsorily fundedpromotion and R&D was mainly behind the noconfidence motion in November 1998.

The Task Force examined AWRAP’s R&Dprogram and the Woolmark Company’spromotion activities. It also reviewed a widerange of external reports, and spoke to manypeople on the subject. Moreover, many of thesubmissions addressed these issues.

As a result, the Task Force was able to draw anumber of conclusions and developrecommendations which are outlined in thefollowing sections. The Task Force considersthere are good reasons for being positive aboutthe future if – and only if – people becomemore businesslike and professional inmanaging their woolgrowing and other woolbusinesses.

In particular, the Task Force is excited by thedevelopment of Optim technology via CSIRO –which reduces the wool fibre diameter by 25percent and adds new lustre. It essentiallycreates a totally new product from within thesame sheep factory and appears to havesignificant commercial potential.

5. The Conduct of R&D andPromotion

The viability of

Australianwoolgrowing businesses

from no w on should essentiall y be the responsibilty of

owners of thosebusinesses...

7

The Task Force has concluded that pastreliance by woolgrowers on collectiveorganisations has been excessive. There havebeen too many of these organisations andstructures, some of which have stood in the wayof progress rather than facilitating it. Inhindsight, they alone could never prevent adecline in the competitiveness of the woolfibre in the global textile market, nor deliversufficient on-farm productivity growth to offsetthe effects of reducing wool prices in realterms. The argument that without thecollective organisations, the position wouldhave been even worse, is not compelling.

The present situation of wool’s competitivenessin the global textile market is extremely seriousand, above all else, requires a fundamentalchange in culture and attitude amongwoolgrowers.

Task Force Recommendation 1

The viability of Australian woolgrowingbusinesses from now on should essentiallybe the responsibility of the owners of thosebusinesses.

That is not to deny that there arecircumstances where compulsory, collectiveaction remains desirable and justifiable. Thisrequires an organisation, but one with a totallydifferent structure and mind-set to that whichpresently operates. The Task Force’srecommendations on this matter, which involvethe creation of “Australian Wool Services”, areset out in Section 16.

Conclusions and Recommendations

1. Responsibilities ofWoolgrowers Versus aCollective Organisation

8

Chart 1:

Long Term Real

Prices of Wool

Chart 2:

Real Prices for

19 and 23 Micron Wool

Chart 3:

Wool Prices and

Costs of Production

0

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

200

400

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1000

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c/kg

gre

asy

(199

7-98

dol

lar

s)

0

500

1000

1500

2000

2500

3000

3500

4000

c/kg

cle

an (

1995

dol

lar

s)

Real 19 micronReal 23 micron19 micron trend

23 micron trend

1994 1996 1998

23 micron trend

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992

19 micron trend

< 20 micron woolgrowers

200

400

600

800

1000

1200

1400

1600

1800

1991 1992 1993 1994 1995 1996 1997 1998 1999

c/kg

cle

an

Wool priceWorst 20% of performers (high costs)AverageBest 20% of performers (low costs)

19 micron price

20-22 micron woolgrowers

c/kg

cle

an

200

400

600

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1000

1200

1400

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1991 1992 1993 1994 1995 1996 1997 1998

21 micron price

> 22 micron woolgrowers

c/kg

cle

an

200

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1200

1400

1600

1800

1991 1992 1993 1994 1995 1996 1997 1998 1999

23 micron price

Figure 1

Figure 2

Figure 3

The charts on the opposite page highlight theseriousness of the predicament facingwoolgrowers:

• Chart 1 shows that clean wool prices havefallen steadily in real terms since 1956 – ashave most raw material prices;

• Chart 2 shows that the real price of 23micron wool has been falling twice as fastas 19 micron wool since 1970; and

• Chart 3 shows clean wool prices since 1991for 19, 21 and 23 micron wool, eachoverlaid with current costs of productionfor three performance categories: the“best” 20 percent, the average, and the“worst” 20 percent. It shows that the bestwoolgrowers are profitable even at currentprices, but the worst woolgrowers rarelyhave been profitable over the past decade.

Conclusion

Whether a woolgrowing business is large orsmall, wool only or mixed enterprise, the year-in year-out cost of producing a kilogram ofclean wool should be at or near to, the “best”20 percent lines in Chart 3. Chart 3 highlightsthat most of the responsibility for sustainedprofitability lies with actions by individualwoolgrowers – on their own farms.


All woolgrowing businesses musttake one or more of the followingactions:

• increase the revenue from theirwool; and/or

• reduce the cost of production perkg to that currently being achievedby the best 20 percent ofwoolgrowing businesses; or

• change their enterprise mix or sellthe farm.

An obvious first requirement is that costs ofproduction for each woolgrowing businessmust be clearly established, if necessary byobtaining professional assistance.


Woolgrowers should participate inbenchmarking analysis or best practicegroups so that the year-in year-out costs oftheir businesses are known, can becompared, and opportunities forimprovement identified. All costs should beincluded, including the appropriateallocation of overheads, debt interestpayments and an allowance for drought.

The next three sections expand on thethree alternative decisions.

9


2. Individual WoolgrowingBusinesses Must MakeCrucial Decisions, andMake Them Now

Chart 4:

Increasing Wool Value

10

• Employ farm consultant for benchmarkinganalysis - adopt “best 20 percent” practices

• Read and adopt past research findingswhere appropriate

• Understand market data

• Understand the use of futures, forwardselling, alternative selling systems

• Seek appropriate professional advice

• Sheep selection (average FD; CV of FD)

• Coincide shearing with seasonal break

• Investigate new harvesting systems (suchas Bioclip)

• Bloodline/sire selection: use sirereference and Merino Benchmark data

• Objective measurement of other knowncharacteristics

• Sheep classing on-farm (wool sampling,OFDA, Laserscan measurement etc)

• Wool pack material

• Other wool-shed contaminants

• Baling twine etc

• Stained or dark fibres (wool classing, preshearing treatment, sheep classing)

• Regional or bloodline based

• Investigate marketing initiatives, egFibre Direct, SRS, Pooginook, Egelabra etc.

• Obtain clearer feedback from processorsand the market place

) and

Improve knowledge ofwool’s intrinsicperformance

Long term supplycontracts

Test for/displaydistribution of FD orany other objectivemeasurements at timeof sale, to enhancevalue

Lock in acceptableprices relative to costof production

Achieve superiorperformance at alllevels

Provide a qualityguarantee or join a QAscheme that works

Increase wool valuewithout sacrificing woolcuts or increasing costsof production

Join growermarketing groups

Eliminatecontamination ofwool

Higher processingvalue or (finer micron)

Breed for more wool

Eliminate coarsefibres (initially over30 micronstender wool)

Improve riskmanagement

Keep on top ofresearch and marketdata

OBJECTIVE STRATEGIES OUTCOME

There are many ways individual woolgrowers –or groups of woolgrowers – can enhanceprofitability by increasing revenue, whether byproducing wool more efficiently (per sheep,per hectare or with more sheep) or obtaininghigher prices for better prepared or betterquality wool. Several options appear in Chart 4on the opposite page; the list is not exhaustive.

Demand trends are indicating a progressiveshift to finer, lighter fabrics, therefore anincreasing preference for finer wool. Between1950 and 1981 there was an average premiumof 12 percent for 19 micron wool over 23micron wool. Between 1981 and 1999 thatpremium had widened to 36 percent, despite asignificant increase in the proportion of theclip 19.5 microns and finer.

Conclusion

Maximising woolgrower revenue requires aprofessional management and businessapproach to the entire woolgrowing andfarming enterprise. Woolgrowers should utilisecompetent professional advice, and the arrayof objective systems now available for breedinghigher value wool and/or more wool.


Woolgrowers must take individualresponsibility for the quality andperformance of the fibre they produce.They should eliminate all possible fibredeficiencies (especially contamination,certainly black, stained and coarse, andpreferably tender, fibres) and givecustomers confidence that they aredelivering a consistent, price competitive,quality textile raw material. They shouldprovide a quality guarantee or join a QAscheme that works.

At present, very few woolgrowers understandwhat happens to their wool after it is sold, letalone their customer’s requirements.Consequently, they are not in a position toservice that customer’s needs. This needs tochange.


Woolgrowers should:

• adopt commercial business riskmanagement strategies and consider longterm supply agreements for at least part oftheir clip;

• communicate effectively with theirprocessor customers, obtaining andresponding to feedback; and

• seek critical market mass by combiningwith woolgrowers producing similar wools.

11


3. Enhancing WoolgrowerProfitability: IncreasingRevenue

Chart 5:

Farm Leasing Case Studies: A Benefit to Lessor and Lessee

Syndicated leasing (WA)

• 11 woolgrowers offered lease of 3100ha,early 1998

• 10 accepted, formed unit trust

• runs 30000 wethers for live export

• participants run more ewes on theirfarms

• current low wool prices not a detraction

Lessor perspective

• farmer had the opportunity to leaseneighbouring farm

• little spare labour and a young family

• so he let another neighbour lease bothfarms and became the manager of both

• less risk, less stress, higher net return,better lifestyle, more family time

Group farming

• 3 farms combined to optimise cerealmachinery purchase, 1979

• now also incorporates merino enterprises

• professional advice establishedappropriate returns for land, labour andrisk capital

• all employees paid commercial rates plusbonuses

• economies of scale, new technology,sound structures, good management andcommunications

Intergenerational challenge

• farm not large enough for parents plustwo sons

• leasing extra land started small,progressively expanded to several farms

• forced sharper management of costs andlivestock

• lessors have included a widow, nonfarming descendants, and urbanprofessionals

Alternative career

• farmer wanted to pursue alternativecareer

• negotiated a 9 year lease with 2competent farmers

• lessor has contributed some livestock andnew investment for water and fences

• lessees contribute labour for fencing etc

• both parties committed to long term

• now in the fourth year and working well

• lessor will obtain livestock back at the endof the lease

Woolgrower expansion (Eastern States)

• efficient woolgrower wanted to expand

• advertised for suitable properties

• the further afield, the larger the unitwould need to be

• 8000-16000 dse’s per unit

• no appropriate takers yet!

Leasing common in one WA Shire

• over 30 percent of cleared land in WestArthur Shire leased

• conventional leasing or lease back orshare farming

• profitable if lessor has spare labour andplant capacity

• nearly half the 80 members of the DarkanFarm Management Advisory Service leaseat least one property

Temporary sheep loan

• woolgrower wanted to crop more land

• so he loaned his young sheep to aneighbour free of charge, to be returnedoff-shears 12 months later

• lessee derived the wool proceeds, lessorincreased crop revenue and obtainedadult sheep at the end of the period

12

Woolgrowers need to examine clinically allfacets of their cost structures, especially in lightof wool’s fibre competitiveness and the adverseimpact of increasing soil salinity and acidity onmuch of the land base. The best 20 percent ofwoolgrowers earn net returns three times theaverage. Woolgrower average productivitygrowth in recent years has averaged around 0.5percent per year, well below the 1.6 percentachieved by beef producers and the 3-4percent by wheat and cotton farmers.


Woolgrowers should:

• aim to achieve annual productivityimprovements of 3-5 percent, even afterthey have reached “best 20 percent” costlevels;

• assess their overall farming structure andthe feasibility of improving land, labourand risk capital productivity via increasedpurchases or leasing;

• improve pasture productivity and pasturemanagement practices; align key sheepevents (lambing, shearing) with the annualpattern of pasture production; and

• accelerate the rate of geneticimprovement, utilising the results ofcomprehensive analysis now available (forexample, Merino benchmark).

Leasing of land has not been common inAustralia (especially Eastern Australia) but itrepresents an option of potential benefit toboth lessor and lessee. The Task Force hasfound a wide range of leasing situationsoperating satisfactorily, as Chart 5 on theopposite page describes.


Woolgrowers contemplating expansion oftheir business, or those wanting to ceasewoolgrowing, should carefully consider themerits of leasing land (lessor or lessee). Indoing so they should seek professionaladvice on structures and mutual obligations.

The Task Force considers it is not reasonablethat the next generation of wool harvesters willwant to drag the equivalent of 15 tonnes ofsheep each day. New handling and harvestingsystems are either here or just around thecorner – for example, Bioclip, the SLAMPmachine, or others.


Woolgrowers should seek the introductionof new competition into wool harvestingsystems so that increased labour flexibilityoutside the rigidities of the pastoral industryaward can deliver cost savings towoolgrowing businesses and improvedhealth to those doing the harvesting.

The maximum bale weight limit of 204 kg –which relates to a now obsolete system ofhandling bales by trollies in brokers’ stores –should be abolished.

13


4. Enhancing WoolgrowerProfitability: ReducingCosts

A significant number of woolgrowers areunlikely to make changes sufficiently quickly toensure adequate profitability from theirwoolgrowing enterprises.

From every perspective – from a business andeconomic point of view, from a landcare andanimal welfare point of view, but above allfrom a family point of view – it is desirable thatrealistic assessments be made promptly bythese woolgrowers and their families. Theiroptions are:

• shifting into alternative enterprises – suchas other grazing enterprises, cropping,horticulture or growing trees;

• leasing the farm – with alternativeemployment or retirement; or

• selling the farm.

Selling up involves family structures andquestions of location, pride, self-esteem, fear ofnot finding alternative employment, and theloss of a livelihood and assets which may havebeen in the family for generations. Butdelaying the inevitable usually makes the finaloutcome even more painful.


Woolgrowers facing major adjustmentshould re-examine Chart 3 and confirmtheir chances of reaching “best 20 percent”cost levels. Especially where the sale oftheir farm is in prospect, woolgrowersshould seek professional advice promptly,and/or the help of local support groups.

Government adjustment assistance onlyscratches the surface of the problem and maygive false hopes that farming families cantough it out. Although it might not bepolitically correct to say so, every woolgrowingbusiness encouraged to remain a little longerwhen its ultimate viability prospects are bleak,represents an expansion opportunity blockedfor another business.


Rural adjustment assistance should focus onhelping non viable woolgrowers exit theirbusinesses as quickly and painlessly aspossible and should not block theadjustment process by providing falsehopes, such as interest rate subsidies.

In leasehold title regions, landholder flexibilitycan be curtailed by legislative restrictions. Forexample, in the western division of NSW,formal approval is required before awoolgrower can sub-let a property to anotherwoolgrower. A preferable solution would bethe freeholding of much of the pastoralleasehold land, subject to certain land usecovenants (especially stocking rate limits).


State Governments should remove anyremaining obstacles to viable operatingstructures for woolgrowing businesses onleasehold land, or expedite the conversionof leasehold title to freehold.

14


5. Facilitating Adjustment

It became clear to the Task Force during itsconsultations that some Australian exporters ofgreasy wool or tops do not always deliver whatthe buying order stipulates. Some overseastrading houses do the same. This practice,while obviously not widespread, damages trustand potentially the reputation of all Australianwool. Problems have mainly involved China buthave also arisen elsewhere. Use of the newChina “model wool contract” should assist torestore trade confidence and trust.

Wine exporters operate an effective “LabelIntegrity Program” under the auspices of theWine and Brandy Corporation, ensuring truthin labelling. The scheme provides anassociated audit trail. Prosecutions for fraudhave been extremely effective.

Conclusion

The practice of not delivering to specificationshould cease immediately and a simple systemthat prevents it, or allows complaints to bedealt with effectively, should be put in place.


A truth in labelling scheme shouldimmediately be established byCommonwealth legislation for all Australianwool requiring that:

• all wool be accurately described as to itsknown content at the point of export;

• relevant test certificates be held by the testhouse concerned;

• a truth in labelling unit within the testhouse handle complaints; and

• the confidentiality of processor intellectualproperty be safeguarded.

15

6. Truth in Labelling forAustralian Wool

(Light-weight OPTIM woven fabric)

Chart 6:

Manufacturing Supply ChainRelationships

Defence

“Success in defence contracting depends onthe strength of your partnerships. We don’tthink of ourselves any more as primecontractors but as team leaders. The othermembers of the team will be large,international, high technology companiesor, perhaps, smaller companies withdesirable intellectual property or knowledgeof particular markets or products. Thesuccessful team will be one that is open witheach other and shares knowledge andexperience as well as having a goodunderstanding of how risk is shared.”

Construction

“The construction industry is verycompetitive. Contractors rely onsubcontractors and suppliers to quote themthe most competitive price. Contractors stillcall bids for work or supplies but more oftenthey form long term relationships whereprices are set by negotiation and both sidesrely on the mutual dependency of therelationship to ensure that each is fair andreasonable. We believe by this means thehighest possible standards and quality areachieved.”

Wine

“In 15 years the Australian wine industry hasbeen transformed from a relativelyunsophisticated wine grape supply situationto one where nearly every grapegrower has acontract with a winemaker. The contractmay actually specify which label of wine issubsequently produced and from whichvineyard block the grapes must be picked.As part of the contract there is a free flow ofinformation between grapegrower andwinemaker, for their mutual commercialbenefit. The focus is always on achievinggreater predictability, quality andconsistency, so that new markets can becaptured.”

Source: Leading CEOs in the respective industries,personal communication.

Chart 7:

The Wool Textile Chain“Wineglass”

16

Retailers/Consumers

Knitters/Weavers/Finishers/Dryers

Garment makers/Designers

Spinners

Topmakers

Exporters

Brokers

WoolgrowersFutureSystems

The Task Force has concluded thatcommunication between woolgrowers andtheir customers is inadequate. The impersonalnature of the auction system is a majorimpediment although prices, of course,constitute the single most important purchaserfeedback – even if the messages they conveyare not always palatable.

Most successful manufacturing industries havedeveloped strong supply chain relationships, asChart 6 describes. Previous buyer/sellerconflict and opportunistic trading have givenway to mutually dependent long termpartnerships. Many woolgrowers are keen todo the same – either individually or, given therealities of size, in groups. Some have startedthe process. It is made more difficult by the“wineglass” structure of the processing chain,depicted in Chart 7, and will not be achievedwithout considerable woolgrower effort.

Conclusion

Many topmakers blend “down to a price” – not“up to a quality” – involving batches of up to1000 farm bales and some cheaper inferiorwools. Obviously blending increases the riskof contamination unless great care is taken.Some topmakers seem unwilling or unable toprevent contamination or precisely identify itssource. They tend to offset their risks bydiscounting all wool purchased. Sometopmakers, and some spinners, are an obstacleto feedback passing down the chain towoolgrowers from later stage processors,where diversity reappears.


Woolgrowers should consider participatingin regional or bloodline marketing groups,or dealing with merchants as in the cottonindustry, for the purpose of achieving largerconsignments, supply chain relationships,more effective customer feedback and pricepremiums, assisted by a recognised QAscheme or quality guarantee.

Topmakers should insist on only purchasingquality assured wool to minimise the risk ofcontamination.

Conclusion

The Woolmark Company has also been ablockage to more effective communicationbetween processors and woolgrowers. It is notgeared to service professional woolgrowerseffectively. In the past there have beennumerous cases, in the Task Force’sjudgement, where unpalatable messages fromprocessors have not been relayed towoolgrowers for fear of offending them(political versus commercial accountability).


A biennial wool conference should beinstituted, to be held in Australia, to giveprofessional woolgrowers, leading woolprocessors, service providers andresearchers around the world theopportunity to exchange views in a waywhich has never happened before.

17


7. ImprovingWoolgrower/CustomerCommunication

While the traditional auction system assemblesbuyers and sellers in one place and time, andarguably produces the best price on the day, itis an impersonal and costly method of pricediscovery which has been supplanted in manyother markets (for example, cotton).

Electronic selling is at the point of beingimplemented and at last appears to enjoystrong support from woolgrowers, brokers,buyers and processors.


Electronic auction selling should becommenced within the next 2 to 3 months.It should be available to be used by anyone,anywhere in the world, who is able toconnect to the system.

Electronic selling would mean completelydecentralised selling – and buying. Samplescan be displayed and paid for by sellers.Sellers would have the opportunity to displayall available data on their wool – again at theircost – which would help to break down theFAQ mentality of the past.

The market place should determine whichsystems of wool selling – traditional auction,electronic auction, electronic offer boards,private treaty, tendering, direct consignment,or long term supply agreements – shouldprosper. What is required is a fully competitiveenvironment where new ideas can be trialledcommercially – and promptly.


Associated electronic offer boards – wheretested wools are available for sale to theworld on a 24 hour a day 7 day a week basisto any purchaser, subject to woolgrowerreserves – should be implemented without delay.

The Australian Wool Exchange (AWEX) wasestablished after the demise of the AustralianWool Corporation (AWC) to supervise theorderly operation of auctions, provision ofmarket information and development of QAstandards. It has come to see itself as a“business” in its own right, rather than just as afacilitator. Its desire to control theintroduction of electronic selling – and receivea revenue stream in the process – is anexample.

Conclusion

Instead of being a catalyst for reform, AWEXhas become an inhibitor. Its centralised role issuperfluous, especially with electronic trading.


AWEX should be disbanded and itsfunctions assumed by whatever voluntarygroupings of market participants emerge.

If this does not happen quickly, theAustralian Competition and ConsumerCommission (ACCC) should rescind theauthorisation which exempts AWEX fromthe normal provisions of the Trade PracticesAct, and/or the Competition Tribunalshould uphold the appeal to the decisionwhich is pending.

18


8. New Systems of WoolSelling

AWTA has been a valuable organisation servingwoolgrowers and wool processors in Australiaand overseas. Its professionalism and theconsistency of its test results enjoy a wideinternational reputation. It has done acommendable job in promoting testing oflength and strength and developing a practical,workable electronic selling system. It has nowalso pledged explicit technical support to thedevelopers of the OFDA 2000 machine.

However, its status as a tax exempt, non profitcompany, limited by guarantee and without apermanent share capital, has helped it see offseveral would-be competitors. In practice, ifnot in theory, it is a monopoly service provider.The Task Force has concluded that AWTA has:

• been reliant on the Airflow fibre diametertesting technology for too long;

• been slow in encouraging new testingmachines (such as Laserscan) or thetesting of new fibre characteristics (such aspercentage of fibres over 30 microns, orcurvature); and

• built up excessive reserves (over $61million as at June 1998) which ensures thatcompetitors will be defeated and which theTask Force considers could be better usedfor the benefit of woolgrowers (who paidmost but not all of the charges creatingthese reserves).


The new ATWA should become aconventional company with its shares ownedby woolgrowers via Australian Wool Services

This may be acheived in two ways. Thedirectors of AWTA should approve thetransfer of the assets and undertaking of thebusiness to Australian Wool Services(Section 16) for a nominal consideration,subject to appropriate legal and taxationadvice. Alternatively, AWTA should bedemutualised by the issue of permanentshare capital to members; followingdemutualisation, there should be a

placement of ordinary shares to AustralianWool Services for a nominal consideration,the purpose of which would be effectively totransfer ownership of the restructuredAWTA to Australian Wool Services. Thesechanges should take effect from 1 July 2000.


AWTA should play a more explicit catalyticrole, encouraging the adoption of newtechnology in testing and related areas. Thismay include electronic selling and theintroduction of on-farm testing, first via theissuing of guidance certificates andultimately an effective and practical on-farmcertification scheme. This should facilitatethe electronic sale of wool while it is still inthe shed, a logical and desirabledevelopment which would enhancewoolgrower selling strength and in turnenable more efficient transport at thebuyer’s direction.

AWTA should also be involved in operating thetruth in labelling scheme (Recommendation12).

19

9. Australian Wool TestingAuthority

The Task Force was surprised that a number ofwoolgrower submissions – though a smallminority overall – advocated the return ofsome form of RPS. To most of thesewoolgrowers, the concept was not wrong,merely its execution during the late 1980s.With clearer safeguards, they felt a revised RPSscheme could work effectively in future.

The main argument advanced in support of anRPS was its capacity to deliver relative pricestability, of benefit to both woolgrowers andprocessors. To the extent that they think this isa desired objective, it should be pursued bywoolgrowers themselves through normalmarket mechanisms, principally the use of riskmanagement tools or long term supplycontracting.

In case there is any doubt on the matter, theTask Force wishes to be absolutely clear:


Under no circumstances whatsoever shouldany form of RPS for wool ever bereintroduced in Australia.

20


10. Reserve Price Schemes

Successive Commonwealth Governments havebeen at the vanguard of efforts to liberaliseworld trade, including liberalisation of textiletrade barriers. These efforts have beenstrongly advocated by woolgrowers and arefully endorsed by the Task Force. Bilateraltrading initiatives should also be pursued, forexample, with China and India.

Unfortunately, the Government itselfsuccumbed to sectional pressures when itopted for a five year tariff pause for localtextile, clothing and footwear (TCF)manufacturers. Current Australian tariffs onimported wool products (up to 31 percent)provide powerful ammunition for othercountries (such as India) to maintain their ownhigh tariffs, and fend off pressure for reformfrom Australia’s Trade Minister. Theseoverseas tariff barriers disadvantage Australianwoolgrowers enormously.


The Commonwealth Government shouldcontinue its consistent advocacy ofliberalised trade in textile products, andshould ensure that domestic TCF tariffsresume their downward path at the end ofthe five year tariff pause.

China’s complex quota system for importedwool deserves particular mention, if onlybecause China is such an important woolcustomer. The quota scheme creates majoruncertainty for Chinese buyers and processors,and Australian woolgrowers and exportersalike. Worse, it prevents some buyers frombeing knowledgeable about what they shouldbe purchasing. Some Chinese trading houseswhich receive quota allocations do not helpChinese processors in the pursuit of thisknowledge. Electronic trading will provide awider spread of knowledge.

Ideally, the whole quota scheme should bescrapped, but as a minimum it needs tobecome more predictable, transparent and lessintrusive. Current regulations also make itmore difficult for Chinese mills to obtainforeign exchange approval, once import woolquotas have been allocated.


The Commonwealth Government shouldstrongly encourage Chinese authorities toliberalise China’s wool quota regime,initially by increasing the proportion ofquota allocated directly to mills rather thantraders, abolishing quota on re-exportwools, providing a full value added tax(VAT) rebate on wool product exports, andaccelerating the privatisation of StateOwned Enterprises.

21

11. Trade Policy and Wool

Commonwealth and State Governments havebeen heavily involved in various facets ofwoolgrowing and marketing over many years.Unfortunately, this heavy involvement has ledto politicised decision making, in stark contrastwith cotton, for example. Areas of governmentinvolvement have included:

• State Governments pursued wellintentioned, but ultimately damaging,closer settlement schemes;Commonwealth and State Governmentshave offered adjustment and droughtassistance – with mixed results;

• successive Commonwealth Governmentsestablished the RPS, later gavewoolgrowers more control in setting thefloor price, then abolished the schemeafter the stockpile had reached over 4million bales, and finally made a sequenceof major policy changes affecting themanner of the stockpile disposal;

• the Commonwealth Government continuesa long-standing policy of matching ruralR&D levy expenditure, up to 0.5 percent ofgross proceeds, and a wider 125 percentR&D tax deduction to business in general;the Government argues that the wholecommunity benefits from a strong R&Dfocus and that the support encourages“public good” research which otherwisewould not take place to the same degree;and

• for a number of years the CommonwealthGovernment made significant taxpayerpayments for wool promotion.


The Commonwealth Government shouldcontinue its matching 0.5 percentcontribution for wool R&D.

The Commonwealth Government’s $772million assistance package to coincide with atariff pause to TCF manufacturers between2000 and 2005, includes $700 million for a

Strategic Investment Program. It is “designedto encourage new investment, R&D, innovativeproduct development and value adding inAustralia’s TCF manufacturing industries,particularly in those sectors utilising Australia’swool, cotton and leather where we have asignificant natural advantage over many of ourinternational competitors”. These objectivesare precisely the focus of this report on wool.However, the Task Force is concerned thatexcessively detailed rules for the expenditureof the funds might prevent the effectivecommercialisation of new innovative woolproducts and development of clusters of woolprocessing businesses.


To ensure that the Government’s TCFassistance objectives of encouraging newinvestment, innovation and value adding ofwool-based processing in Australia are met,a significant portion of funds from theStrategic Investment Program should beallocated to Australian Wool Services.Subject to the appropriate safeguards, theboard of the new organisation should beresponsible for spending these funds andobtaining the appropriate returns.

22


12. The Role of Government

Despite its wool production advantages,Australia has not developed a competitive woolprocessing tradition beyond the topmakingstage. The proportion of greasy wool combedin Australia has risen steadily to over 30percent. However, in the spinning, weavingand knitting sectors, there has been a declinein domestic activity.

The Task Force considers that these later stageprocessing trends may be about to change:

• Australia’s recent low inflation, stronggrowth performance, and a morecooperative and flexible industrialrelations environment, have improved itsattractiveness as an investment location;

• Australian business flair is beingdemonstrated in a growing range ofactivities – such as software, film making,advertising, wine making, cheese making,and so on;

• there have been a number of nicheinvestments in wool garment-making, someof which are now exporting successfully;several leading Australian fashiondesigners are winning growinginternational reputations;

• new machinery and technology haveenabled further automation in knittingand garment-making;

• CSIRO has concentrated all its woolprocessing research facilities in Geelong;and

• the recently opened International FibreCentre in Geelong is seeking to build onan established cluster of expertise in theregion, and enhance a commitment toeducation and training.

The Task Force has also been made aware ofsome new commercial interest in value addinginvestments, including joint ventures betweenAustralian firms and established overseas woolprocessing expertise. The Task Force isencouraged by this renewed interest becauseits judgement is that unless a significantproportion of wool can be processed through

to the fabric stage in Australia, it will bedifficult for woolgrowers to know enoughabout their product to be other than rawmaterial price takers.

While not drawing too close a parallel, it isworth highlighting the enormous strides takenby winemakers over the past decade or so,reflecting not only Australia’s suitable climatefor growing grapes, but the application ofsuperior viticultural and wine makingtechnology compared with some of thetraditional overseas centres of excellence.

If there is to be a resurgence of commercialwool processing investment in Australia, it willneed innovative wool fibre technology, mostlydeveloped by Australian researchers. Thisunderscores the importance of a sufficientallocation of funds from the TCF StrategicIndustry Program for wool fibre innovation.


International and domestic investors in woolprocessing should carefully assess thepotential for new value adding investment inAustralia which would capitalise on bothmore commercially focused wool fibreinnovation, and an improved overallinvestment climate.

23

13. Value Adding

Expenditure on promotion has far exceededexpenditure on R&D as far as both woolgrowerlevies and Government funds are concerned.Since 1936-37, wool promotion expenditurehas amounted to around $6 billion in today’sdollar terms. Having spoken literally tohundreds of people, looked realistically at theoptions available, and thought hard about theissues, the Task Force has come to a number ofconclusions:

• the word “promotion” is confusing in thatit covers too many activities and ismisinterpreted, especially by woolgrowers;the Task Force prefers the terms“consumer marketing” and “productmarketing”;

• consumer marketing, especially in maturedeveloped markets, is principally theresponsibility of retailers and brandowners; generic symbols like the Woolmarksymbol have less relevance than they oncehad, and the identification of measurablebenefits to woolgrowers is difficult toestablish; some respected marketers toldthe Task Force that generic advertising nolonger works;

• in any case, Australian woolgrowers thesedays have nowhere near the financialresources to fund meaningful genericadvertising programs throughout thedeveloped textile markets of the world; thedevelopment of carefully tailored andcommercially funded symbols may haveapplicability in some markets or marketsegments;

• commercial firms may be able to leveragethe existing recognition of the Woolmarksymbol – two examples being theWoolmark endorsement given to Procterand Gamble’s new home dry cleaningproduct, Dryel, and the use of theWoolmark by the large Japanese retailerAoyama on 70 million advertising leafletsdistributed to Japanese homes each week;

• in some countries (such as China and,interestingly, the United States where woolconsumption has always been low) theWoolmark symbol still makes a positivecontribution in denoting quality products;if practical, its use should be confined toproducts made from Australian wool, nowthat other countries no longer contributeto its funding; and

• product marketing – that is, amongbusinesses within the wool textile chain – isvital, especially at the designer/garmentmaker level where fibre choice decisionsare made.


Levy-funded generic advertising atwoolgrower expense should cease forthwith.

Product marketing is by far the mostimportant marketing responsibility that anew collective organisation should have; “itstask is to influence decision makers to usewool”, in other words, to commercialise andimplement the innovation brought about byR&D.

The word “promotion” should disappearfrom the lexicon of the new organisation.

24


14. Promotion

Innovation into the wool fibre and itsprocessing is essential if wool businesses are tocatch up and then keep pace with innovationin other textile chains. While it is undoubtedlytrue that many wool processors conduct theirown research and product development, someactivities are beyond the scope of individualfirms. Moreover, Australian woolgrowers aregenerally not able to “free-ride” on researchconducted in other countries – as Australiancotton growers, for example, can free-ride onUnited States cotton research.

Thus, the Task Force has reached the followingconclusions:

• collective R&D continues to be of vitalimportance, for which a market failurejustification remains valid in many, but notall, circumstances;

• it is more likely that the benefits of on-farm R&D can be captured bywoolgrowers; the further away from thefarm, the more likely it is that the benefitswill be shared between other marketparticipants, with obvious implications forfunding responsibility;

• on-farm R&D should be focused in areaswhich have whole of industry benefitsrather than geographical single issuesolutions;

• a range of off-farm R&D activities,especially those directed at correctingexisting deficiencies and enhancing theproperties of the wool fibre, is absolutelyessential if wool’s competitiveness in thetextile market is to be enhanced;

• it is not realistic for such projects to befunded only by wool processors, givenhistorical relationships and the currentstate of wool demand;

• in the past, many collectively-funded R&Dprojects have been poorly conceived andconducted; some have continued well afterthe prospects for success have beenrecognised as low; the ownership ofintellectual property resulting from theresearch has not always been clearlyestablished – it should reside with theresearch funder;

• the implementation/commercialisation ofresearch results has in most cases beenpoor, lacking commercial acumen, andthus taking far too long;

• the administration costs of AWRAP/TheWoolmark Company are excessive; and

• it will be inappropriate for a newshareholder-owned wool organisation,Australian Wool Services, to part fundindustry bodies (AWRAP’s 1997-98 fundingof the Wool Council was $290,000).


The primary focus of a new collectiveorganisation Australian Wool Servicesshould be on innovation and itsimplementation.

25

15. Research and Development

Chart 8:

Australian Wool Services

26

Vote before31.3.01

AC

TIV

ITIE

SF

UN

DIN

G

InnovationOperatingSubsidiary• Accountable for investments

IMPLEMENTATION/

Investment

IntellectualProperty

Technology

Royaltiesetc

IMPLEMENTATION/COMMERCIALISATION

• Sale of IP

• Strategic alliances

• Joint Ventures

• Asian Development Centre/European Development Centre

• Every technology contestible

AWTA• Commercial subsidiary

• Wool testing• On- farm, In-shed testing• Electronic selling?• Truth in labelling program

ImplementationOperatingSubsidiary• Profit making

INNOVATION (R&D)

- Companies/consultants

- Others

• Every $ Contestible

- ZACs (info/advice)

- CSIRO/Unis/StateDepts

- Grower groups

- Others

• Fibre Research

- CSIRO/WRONZ

- Unis (Aust/overseas)

- Companies

•On-Farm Research

Services toMembers

Members• Shareholders• 1 share/$100 levy paid, starting 1.7.99

$

$Services toLicensees

AUSTRALIAN WOOL SERVICES

$0.5%

Govt R&DContribution

$$

Woolgrower Levy4% 1999-20003% 2000-2001

2% or less 2001 - 2002

Licence Fees

• $20m? 1999-2000• ? 2000-2001• ? 2001-2002

Trust• Deed of

arrangement• Trustees• Audit role if

necessary

TCF FundsSubject toapproved uses

The Task Force has made importantrecommendations about woolgrowers’responsibilities for the future of theirbusinesses. However, as noted earlier, thereare circumstances where compulsory collectiveaction remains desirable and justifiable. Thisrequires an organisation, but one with a totallydifferent structure and mind-set to that whichhas operated in the past.

The Task Force has concluded that theMinister should appoint a new board ofAWRAP, no later than 1 January 2000, whichwould have the responsibility of preparing anew organisation – a conventional companywhich the Task Force is calling “AustralianWool Services Ltd” (the actual name to bedetermined by the company itself) – and abusiness plan/prospectus on which woolgrowershareholders would vote, no later than 31March 2001.


A new company, Australian Wool Services,should be established to conduct activitiesappropriately performed by compulsorycollective action. It should be structured asa conventional company limited by shares.

Members (shareholders) should receiveshares reflecting their compulsory levycontributions, commencing from 1 July1999.

During calendar year 2000, the board of thenewly formed company – which should be inplace by 1 January 2000, initially as theboard of AWRAP – should prepare abusiness plan or prospectus, to be put to ameeting of shareholders (based on sharesallocated during the 1999-2000 financialyear) no later than 31 March 2001.

At that meeting, shareholders will vote onwhether to adopt the plan – and thuscontinue the company in its existing form –or not.

Chart 8 on the opposite page gives a schematicrepresentation of how Australian Wool Serviceswill be structured and operate.

The company


While it will be up to the company itself todetermine, the Task Force recommends thatAustralian Wool Services’ mission statementshould be as follows:

“To commission wool innovation and tocommercialise the results, for the maximumbenefit of members/shareholders.

“This will be achieved by:

• maximising the value of existing woolintellectual property (IP), including theWoolmark symbol;

• facilitating wool innovation, on acontestible basis, to meet therequirements of the market place; and

• commercialising the intellectual propertyand innovation via industrial marketing of wool”.

Shares and levy rates

Because of the innovation focus of AustralianWool Services, the Task Force has concludedthat no distinction should be made in the levybetween R&D and what was previouslydesignated as “promotion”. However, thematching 0.5 percent Governmentcontribution must be designated entirely forR&D purposes.


Shares in Australian Wool Services will beallocated to woolgrowing businesses on thebasis of one share per $100 of levy paid.The compulsory levy will remain at 4percent for 1999-2000 and will drop to 3percent for 2000-01. The Task Forceconsiders it could drop to 2 percent for2001-2, but this will depend on the outcomeof the shareholder vote.

27


16. Australian Wool Services

Other capital or income

In addition to the woolgrower levy andmatching Government R&D levy, AustralianWool Services would derive capital or incomefrom the following sources:

• a significant allocation from the TCFStrategic Industry Program, as set out inSection 12 above;

• licence fee income, relating to the use of arevamped Woolmark and more clearlydefined fee-based services, possiblyincreasing in total amount;

• any assets of AWRAP/The WoolmarkCompany remaining after it meetscontractual obligations, staff redundancypayments, and so on;

• investment income – royalty payments etc– from the implementation of researchand innovation;

• other income (interest etc); and

• the net equity residing on the balancesheet of AWTA.

The Trust


In order to cover the situation of aconventional company receiving taxpayerfunds and woolgrower levies collected underlegislation, a trust will be interposedbetween the Government source of thosefunds and Australian Wool Services as therecipient. The trust will operate pursuant toa deed of arrangement with theGovernment, along similar lines to that ofMeat and Livestock Australia Limited.

Importantly, the Trustees of the Trust (whomight comprise two or three respectedidentities from woolgrowing and businesscircles) will be required to confirm that thefunds are expended for approved purposes.Should they have any doubts, future levy ortaxpayer funds could be withheld pending aformal audit.

Board tasks


The main tasks of the board will be to:

• establish the structure, operations andculture of Australian Wool Services as aninnovation and implementation company;and

• prepare a prospectus or business plan tobe put to a vote of shareholders/membersnot later than 31 March 2001 and on whichthe future operations of the companywould depend.

Board composition


The board will comprise 10 members –including the Chairman – 3 of whom shouldhave woolgrowing experience withappropriate board level/internationalexperience, 3 having internationalexperience of the wool textile industry, 3with broad business experience, plus thechief executive. The calibre of boardmembers should be at the highest level, withremuneration recognising their expertiseand time commitments. The Board shouldthus have a cross-section of experience, anda demonstrated track record of commercialsuccess and sound judgement, in areasrelating to the company’s mission statement,in particular:

• an understanding of the corporateperformance of R&D and innovation;

• industrial marketing;

• the ability to commercialise the results ofinnovation;

• the changes necessary to produce anappropriate commercial culture within thecompany; and

• international experience.

28


Board members would initially be appointedby the Minister, with the assistance ofprofessional advice. Thereafter, election ofboard members would be a matter forshareholders – like any company – with aproportion coming up for re-election every 12months in accordance with the CorporationsLaw. At the first annual meeting (March 2001)the confirmation of all board appointmentswould be an agenda item.

Transition issues

Considerable changes will be required in thetransition from AWRAP and The WoolmarkCompany to Australian Wool Services.Depending on a full assessment of relevantstatutory and commercial obligations, togetherwith legal and taxation issues, AWRAP and theWoolmark Company may become subsidiariesof Australian Wool Services, or have theiractivities and net assets transerred to it. Onevital requirement – to ensure the necessarycultural change occurs – is that there be a spillof all staff positions. A number of existingemployees would be likely to be offeredemployment in Australian Wool Services –indeed, much of the value of the new companywill reflect the human capital of key staff.However, nothing should be automatic orguaranteed, and the terms and conditions ofemployment may be different.

Australian Wool Services will be a considerablyleaner organisation than AWRAP/TheWoolmark Company. Where it is cost effectiveto do so, overhead functions (such as finance,human resources, legal etc) should beoutsourced, although specific decisions wouldbe made by the new board.

The board should choose the company’s name.The Task Force puts forward two names forconsideration: Australian Wool Services Ltdand Australian Wool International Ltd.

Innovation operating subsidiary

The subsidiary company responsible forcommissioning innovation projects would beaccountable for the performance of itscontractors. All funds would be fullycontestible and information and adviceobtained from groups such as Zone AdvisoryCommittees (ZAC) would form a key input to

the decision making process. A keyrequirement would be the need for clearcontractual obligations, especially theownership of intellectual property resultingfrom the innovation projects – it should residewith Australian Wool Services – and the needfor projects to be completed on contract andin a timely manner.

Implementation/commercialisationoperating subsidiary

This company would be responsible for thecommercialisation of intellectual propertygenerated by innovation investments. Itsperformance would be assessed in aconventional commercial manner. Incommercialising innovations and technology, itmay use intermediary organisations inparticular countries; these could, for example,comprise former Woolmark Companyemployees who had a particular knowledge ofregional markets and wool processingbusinesses.

The company would also be responsible forlicensee negotiations and servicing. The TaskForce sees considerable potential for increasedlicensee income, provided there is a clearerspelling out of the nature of the services beingoffered in return for the licence fee. In otherwords, the licence fee would more closelyresemble a commercial fee-for-service activity,in which the Woolmark symbol (appropriatelyrevamped to denote unique quality productsderived from Australian wool) and employeeor contracted professional expertise (asconsultancy advice) would be the main servicesbeing provided.

AWTA

As discussed in Section 9 above, AWTA wouldbecome a fully owned subsidiary of AustralianWool Services. As well as its traditional wooltesting activities, AWTA would have a role indeveloping an effective system for on-farm orin-shed testing, possibly managing electronicwool selling and handling the truth in labellingprogram. However, it would not be amonopoly provider of these services.

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The prospectus/business plan and vote

The development of the prospectus or businessplan would be the principal task to beperformed by Australian Wool Services during2000. It would set out a number of possiblescenarios for the future development of thecompany and these would be voted on byshareholders at the first meeting, to be held nolater than 31 March 2001. In particular, thebusiness plan would describe how AustralianWool Services would continue in operationalong the lines of the structure set out in Chart8. An important part of the business planwould be an assessment of the future role andvalue of the Woolmark symbol in variousmarkets of the world, and its contribution toproduct marketing in general, and licensees in particular.


There should be sequential questions alongthe following lines put to shareholders atthe March 2001 meeting of Australian WoolServices. Proxies could and would be usedby shareholders unable to attend themeeting:

1.Should there be a compulsory levy of 1percent for the purpose of conductingR&D, innovation and product marketing.

– only if greater than 50 percent of thetotal shareholding of Australian WoolServices voted in favour (yes), wouldthe 1 percent levy continue. Otherwisecompulsory levies would cease on30.6.01; the matching Government 0.5percent levy would also cease; andAustralian Wool Services would eithercontinue as a fully privatised company,with tradeable shares (and possiblestock exchange listing), able to seekcapital from existing or newshareholders as and when it saw fit andeligible for the general 125 percent taxdeduction for R&D); or it would bewound up, with any net assets returnedto shareholders.

2.If the first question has been answered inthe affirmative, then Australian WoolServices shareholders would be askedwhether there should be an additionalcompulsory levy of 1 percent (or suchother amount as specified in the businessplan) to provide funds for thecommercialisation of R&D, innovationand product marketing.

3. Any other questions put by the Board.

In practical terms the two questions wouldbe voted on at the same time withshareholders only being required to vote onthe second question if they had voted yes tothe first question, and so on.

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