Owen Hembry: Wool - no insulation from cold prices

There are, it appears, currently three things you can be sure of in this world - death, taxes and miserable returns for wool growers.

Warm in winter and cool in summer, soft or strong, fashion icon or farm worker - when it comes to wool, nature and breeding created a winner.

And yet the value of wool for many farmers is barely worth the effort.

Data from the Ministry of Agriculture and Forestry last year said inflation adjusted prices were only 6.2 per cent of the peak of the Korean War wool boom, while Rabobank in its annual New Zealand Agriculture in Focus report says prices this year are likely to drop beneath the 10-year average.

Sheep numbers fell 11 per cent to 34 million in the year to June 2008 and wool exports dropped 4.6 per cent to 136,909 tonnes.

Federated Farmers meat and fibre chairman Bruce Wills says prices are abysmal, unacceptable and unsustainable.

For some farmers, wool has become a bit of a byproduct and shearing an animal health exercise, Wills says.

"I'm having farmers ringing me and they're saying, 'Bruce, we just want to know is there a future in wool ... because if there's not, well, that's fine, we'll just move away and do something else, and put those meat-type rams out or continue reducing our sheep numbers'," he says.

Meat & Wool New Zealand chairman Mike Petersen said at last week's annual meeting that a year ago market prices in US dollars had been steadily climbing, but the high value of the kiwi meant farmers did not see the gains. Today, even with the New Zealand dollar down more than 30 per cent, overseas wool buyers have never been able to buy cheaper, he said.

"Higher-priced contracts from buyers offshore have not been honoured, and these same buyers have negotiated lower-priced contracts with our exporters with the currency gains lost to New Zealand farmers," Petersen said.

"The president of the Council of Wool Exporters recently responded to this by claiming that they had no other option and have to continue to trade. This is completely unacceptable in our search for better returns from wool."

Petersen advised farmers to ask buyers if they were aligned to companies that agreed to a lower-priced contract with a purchaser who defaulted on a previous agreement.

"Consider their response when you next send wool for sale from your farm," he said.

In response, Wool Exporters Council president John Henderson says he has been misquoted by Petersen.

"Mr Petersen does not understand that the global recession is all about a slow-down in consumers buying manufactured items and he is completely unrealistic if he thinks prices we got last year can be replicated in this environment, even given the exchange rate," Henderson says.

Wool exporters will re-establish a list of defaulters and circulate it to the industry.

"The growers were paid six months ago on these higher prices and it is the exporters who are taking the loss on defaulted contracts."

This is the latest stoush in the industry.

New player Wool Partners International was launched last July, combining the wool operations of listed rural services business PGG Wrightson with a new farmer co-operative Wool Grower Holdings.

Wool Grower Holdings was formed by Wool Industry Network, which was partly funded by Meat & Wool New Zealand.

The company hopes that farmers will own half the new business through Wool Grower Holdings, depending on how many choose to buy shares in the co-op, and hold 60 per cent of the voting rights.

The exporters council has been critical of both Wool Partners and its chairwoman, former Telecom chief executive Theresa Gattung. This month Wool Partners was challenged by exporters to deliver or go away.

Keith Cowan from exporter H. Dawson said Wool Partners had been talking for months but failed to deliver anything.

"I'd say to Wool Partners that if they can double the price, go out there and show us, rather than sitting on the sidelines and putting out a constant flow of inaccurate comment and claims that denigrate the existing industry and its customers," Cowan said.

Wool Partners chief executive Iain Abercrombie thinks the criticism of the company may have been triggered by a comment from a board member in a newspaper, about doubling prices, which may have been taken as criticism.

"I think it was just a miscommunication really, which often happens in this business,"Abercrombie says.

"It's basically at break even or worse for some growers. It's costing them nearly more to harvest the wool than for what they get for it," he says. "My personal view is that we're probably at the bottom and there's only one way to go for wool pricing and that's up."

NZ Wool Services International last week said prices at wool auctions had seen significant gains for most types.

Some farmers hope prices will improve but others are breeding towards meat and not wool, which will help create a chicken-and-egg situation in which deteriorating quality makes it harder to sell.

"Without consolidating the clip and creating some selling power, as opposed to being a price taker, things aren't going to improve for the farmer because it's like any market, if you keep it fragmented then you'll be picked off by the customer," Abercrombie says.

But Abercrombie says he does not want to replace other exporters, and that consolidating the clip [from the farmgate to

traders and exporters] through Wool Partners will not disadvantage them.

"A lot of these companies have been around for 150 years, they've got strong relationships with customers around the world which would take years and years to try and replicate by anyone else."

The company's strategic principles are to unify growers, to consolidate the wool clip, collaboration in the industry and innovation in the market, he says.

Stage one was to create a company capable of taking wool from farm to floor and Abercrombie will be heading out to explain to farmers how the supply model works, although a prospectus date for the new co-op has not been finalised.

It's hard to grapple with the problems and possible solutions facing the wool industry, particularly with disagreement rumbling along on the inside.

What we can be fairly sure of is the current model is not working for farmers, so something has to give.

If no one finds a plan for a sustainable future that farmers can bank on and budget against then there may not be much of an industry left to argue over.