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KERRY O'BRIEN: Australia's woolgrowers are in deep financial trouble; although they have cut back on wool production, there is still too much wool and too few buyers. Now, a report to government says the wool stockpile must be sold, its management privatised, and let market forces rule. Will woolgrowers accept the plan, intended to revive the industry? The sheep's back - that's our story tonight.

The wool industry is the troubled giant of the Australian economy. When wool is sick, so probably is the rest of the country. Despite attempts to transform Australia into a modern manufacturing exporter, as a nation, we still overwhelmingly depend on our natural resources. In 1988, wool was our number one export; we earned $6 billion in overseas sales; today, we get about half that. That poor performance has dragged down the whole economy and is one of the motives for a far-reaching review of the industry, by prominent trade economist, Professor Ross Garnaut. The Garnaut Report, the thirtieth review in the industry's history, was handed to the Government today. It promises to turn an inward-looking industry on its head. For a start, it recommends privatisation of Australia's wool selling authority; a more aggressive approach to finding new markets; a faster pace for the disposal of the wool stockpile; and a management upheaval. In a moment, three key figures in setting this new free market direction for the wool industry, but first, this background report from Don Greenlees.

DON GREENLEES: For most of our history, Australia has depended on the vast riches of the land, its effective economic life, epitomised by the phrase 'riding on the sheep's back'. But now the industry which once carried the weight of an entire economy is being pushed to the limit.

KEITH CAMPBELL: This crisis is probably the worst on record. We certainly have got the lowest prices in real terms, ever, in the history of the wool industry in Australia.

DON GREENLEES: The prospects for woolgrowers are bleak. In the Monaro district of southern New South Wales, Keith Campbell has been losing $15,000 a year for the past three years. His family have owned this property, 'Yarrawonga', near Bombala, for five generations. The average figures are worse. Specialist woolgrowers will this year, lose almost $40,000.

KEITH CAMPBELL: We are losing families from the land, hand over fist now. They are leaving throughout the whole of New South Wales, Queensland, Western Australia, and the rate of loss is probably 10 percent a year at the present stage.

DON GREENLEES: Can the average wool operation, say two thousand to three thousand sheep with nothing but wool being produced, can that sort of operation survive in future?

MICK KEOGH: On current prices, you would have to say no.

DON GREENLEES: To meet the challenge, woolgrowers are being forced to change old habits. In the Monaro, it has meant retraining shearers and wool classers in quality control.

KEITH CAMPBELL: One of the major problems we have in the wool industry at the moment is the amount of foreign material that enters wool prior to processing. That has to be attacked on a total quality management approach and the first people we start with in fact, are our shearers, our wool harvesters, the board boys, the wool classers, and follow that through, right through to early stage processing.

DON GREENLEES: With the wool industry experiencing one of the worst downturns in its history, there is not much individual growers can do to revive their own fortunes. Reforms of farm practices are useful, but they don't change the basic equation - low prices, over-supply, and weak international demand. It is forcing growers to be more imaginative in how they market and sell their clip, but the fact is, most of the problems lie beyond the farm gate.

Among the innovations are changes to how wool is sold. Increasing numbers of growers are seeking to bypass the system where prices for their wool are set at auction. Instead, many do deals directly with their customers, the textile mills.

KEITH CAMPBELL: There are two really major benefits. Firstly, as solely a cost saving benefit, we have set up in the Monaro here, a scheme which has reduced costs to wool producers by about $38 a bale. And the second benefit, and a very significant one for the long-term survival in the industry, is that we are starting to get proper feedback on the performance of our product as it goes through early stage and latter stage processing.

DON GREENLEES: The key to the industry's problems can be typified by this, a 3.9 million bale stockpile of wool equal to almost an entire year's production. It encapsulates the trouble with wool - a domestic over-supply and insufficient demand in our major export markets. The stockpile is the hangover from the days of boom and bust in the wool market in the late 1980s, when the Australian Wool Corporation was forced to buy its own wool under a price support scheme. The so-called reserve price scheme was the centrepiece of government attempts to manage the wool market since the late 1960s. In 1991, it failed, leaving in its wake a free market for the price of wool, a $2.7 billion debt, and tumbling wool prices.

MICK KEOGH: They have gone from a situation in 1988 where the average price .... or the market indicator, sorry, was over 1200 cents. It is now back to 450 cents.

DON GREENLEES: What does that do for the average growing world operation?

MICK KEOGH: Simple, it cuts down your returns by down to a third of what they have been.

DON GREENLEES: After the federal election, the Government moved to tackle these underlying problems by announcing a major review of the wool industry, headed by trade liberationist, Professor Ross Garnaut. The Garnaut Report has recommended a far-reaching shake-up of the industry, including setting a fixed four year timetable for reducing the stockpile; privatisation of the stockpile's manager, the Wool Realisation Commission, at the end of four years; a cut in the number of the industry's regulatory bodies; and removal of the boards of the Wool Corporation and the Realisation Commission; and a more aggressive push by government and industry to create new wool markets in developing countries, like Mexico. While the policy makers debate a new free market order for the wool industry, some growers have already broken with the secure and heavily regulated past.

Peter and Clare Smith own a specialist woolgrowing property just outside Bombala. Two years ago they realised that survival of their property depended on some brave decisions. They decided to set up their own factory, making jumpers.

PETER SMITH: And it seemed to me at the time, that everyone was talking about everyone in the bush going broke. Well, all that was going to really happen to us that was going to be worse than everyone else is that we were going to go broke first.

DON GREENLEES: Their factory now runs seven days a week, housed in Bombala's old Olympia cinema. By June next year, output will be forty thousand jumpers a year; seven thousand have been exported to the United States this year. The value added to the sheep in the paddock is enormous. Each fleece is now worth about $US800 by the time it is sold as jumpers in New York.

PETER SMITH: If the same fleece was sold in the auction system, on a net price to us, it would be approximately $15. I believe that this enterprise actually will turn our family's financial situation on its head.

DON GREENLEES: For the vast majority of cash-strapped woolgrowers, going into the clothing business is simply not an option, but the message from the top is that wool does have a bright future. The only catch is the whole industry will have to wear some painful change.

KERRY O'BRIEN: That report from Don Greenlees, and now our guests tonight. Simon Crean has been Minister for Primary Industry and Energy for two years. He entered Parliament in 1990, after a twenty-year career in the trade union movement, the last five as President of the ACTU.

Mac Drysdale is the Chairman of the Australian Wool Corporation, a third generation woolgrower, and he has been active representing woolgrowers on a local and national level since 1974.

Dr Andrew Stoeckel is Director of the Centre for International Economics. In 1991, he led a study into the immediate and long-term problems of the wool industry, including the structural changes needed now for success in the 21st century, and the implications those changes would have for managing the stockpile and debt.

Mac Drysdale, how big a shake-up does this report represent for the industry, if it is largely accepted; and does the restructuring mean new faces at the top; and are we going to see fewer, bigger woolgrowers, at the end of the day?

MAC DRYSDALE: Well, I think what the report has indicated is that there is a real need for a change in the philosophy of the industry. I believe that the report has been very positive in its approach. As to whether or not there is going to be a requirement for new industry leaders or for a shake-up as far as the representation of the industry, that will be left, I guess, in time to the Minister and the industry organisations who are responsible for the appointment of the various people.

KERRY O'BRIEN: But you must have a view on that.

MAC DRYSDALE: I have a view that the current boards that are in place have had a very difficult job over the last two years. They have worked with an organisational structure that, after two years of operation, have been seen to have been less than perfect, as explained by the Garnaut committee. Having said that though, there is no good looking back at that. We have got to look at what the recommendations are now. I think they are very positive. They are looking to put in place fewer boards, fewer organisations, and make those organisations more focused, and I think that's very very good operations.

KERRY O'BRIEN: And we are going to see fewer bigger woolgrowers, at the end of the day?

MAC DRYSDALE: I don't think so. You know, it is very dangerous for government instrumentalities or statutory authorities or banks, in fact, to indicate to growers that there is no future in the industry. I'm much more positive than what a lot of the lead-in to this particular program has indicated. I think that there is a marked difference between what we are facing today and what was around in the industry in say, 1970, when the last crisis was about; and the marked difference is that international markets, while they are soft, there is no indication that consumers worldwide are leaving wool. That was not the case in 1970 and I think the basic premise that was put to us today by Professor Garnaut was that the industry does have a bright future, albeit after a number of years of very tough times. As far as the viability of growers and other groups within the industry are concerned, the future is in fact, quite a bright one and I think we shouldn't lose sight of that as far as the industry is concerned, and the impact it can have on the national economy.

KERRY O'BRIEN: I think you have acknowledged yourself, that the image of the industry in the late '80s, including the Wool Corporation, was one of being self-serving, arrogant and selfish. Do you say that those days have already gone, that the people who ran the industry in those days are no longer part of the leadership of the industry?

MAC DRYSDALE: Well, let me correct this, first of all. I don't think they are the definitions I used and I don't recall ever making those sort of statements. Having said that, quite clearly if we want to go back and look at the past, and I am not too sure there is much gain by doing that at this time, okay, there was mistakes that were made. Those people are not in the industry at the moment; the boards that came in at 1 July 1991, are totally different boards; they have got a totally different philosophy. We were put in place to bring about change in this industry and to help assist in the change, from being a very regulated industry to being deregulated.

The transition period has not been easy because of the conservatism of the industry and the number of industry sectors and the fragmentation of the industry. But having said that, I think that we have taken some marked improvement as far as the philosophy of the industry was concerned; and I think, once again, the report today indicated that the committee thought that not only the Wool Corporation, but our international marketing arm, the International Wool Secretariat, and the research and development people, had in fact moved in the right direction, albeit too slow, in their mind. But that's why the report was so positive, because basically, it is advocating a speeding up of that change to going from being regulated, where it was very much a production orientated industry, to a deregulated industry which will mean, as your film has already indicated tonight, that growers are going to become much more market orientated and look for the opportunities that the current situation offers to them.

KERRY O'BRIEN: Andy Stoeckel, the Garnaut Report appears to embrace some of what you have recommended over the years. Does it go far enough, and what do you think its real impact will be?

ANDY STOECKEL: Well really, as I read it Kerry, it is saying that there is no Australian Wool Corporation, an R and D body, and a privatised Wool International, as it is called. Now, that will live and die on its own competitive merits, so no AWC, and a wool R and D body, that is precisely what the 'Wool in the 21st Century' recommended two years ago, and the growers who supported that study then, will be absolutely delighted with that.

KERRY O'BRIEN: And are you convinced about the privatisation aspect?

ANDY STOECKEL: Well, I would like .... you know, there's some more questions there I think need to be asked. There is a big difference between sort of letting things happen and making things happen, and it was a hands-on government body during that transitional period. I always fear that politics may take over and it may never get to a truly competitive private outfit, which has also the right to go bankrupt and disappear, if it doesn't perform.

KERRY O'BRIEN: What is the message for all those smaller, even medium-sized growers who have struggled over the past decade. Is their survival largely guaranteed now or do they, in the end, face selling their farm to the big growers like the Rupert Murdochs?

ANDY STOECKEL: No, their survival is never guaranteed and it never has been, but this move does certainly take away some of the major blocks in the industry. See, the issue and the problems of the industry are not simply the reserve price scheme and the removal of it and the current stockpile. The problems have been building over some time, it's the lack of innovation in the industry, and I know for a fact that there is at least 200 cents a kilogram clean, savings that can be made through better marketing and being in touch with the consumer, as identified in that report.

KERRY O'BRIEN: Simon Crean, if the essence of this report is implemented by the Government, what kind of a wool industry do you think we are going to see four to five years from now?

SIMON CREAN: Well, I think one that is selling more wool, but importantly, doing more with the wool before it leaves the country, Kerry. I think it is going to find that increased demand in regions closer to home than the traditional markets have been, but I also think that there is important opportunity in the US. The other thing, I think, that we have got to tap into is the youth market, convincing people that wool has a role in casual wear by better product innovation; and marketing those wools which are unique to Australia, the finer microns that wear very well close to the skin. But that means that we have got to market the Australian type wool. The way in which we market it is up to the bodies, but I think that Australia has to be much more a country that differentiates its product rather than allows it to continue to be sold just as a bulk commodity.

KERRY O'BRIEN: Do you read Garnaut as saying effectively, the industry needs new brooms sweeping clean?

SIMON CREAN: I think what it argues very strongly, and the thrust is the one that I support, that it's got to think beyond the farm gate. It has got to become a demand driven industry, not supply driven, and it's got to be closer to what the consumer is demanding. This is the first report, and you talked about thirty others that have been had into the industry, but it's the first report, Kerry, I believe, that's looked at this integrated approach to the industry. Now to the extent to which we move in that direction, you obviously are going to need new structures to assist it. Not all of them, of course, will be government or statutory bodies. In fact, what this report argues is that very much the industry and the commercial risk and the aspects that go with it, should be taken by other than government bodies. So I think that it's not a question of looking at the structures first and arguing clean brooms or different heads, or different seats, it is a question of grasping the opportunity that really exists for wool and developing structures which support that.

KERRY O'BRIEN: The industry has traditionally been run by the woolgrowers - is this the end of that era?

SIMON CREAN: Well, I think that you would have to look at what the report says in that regard, and it comes out very clearly and says that whilst there have been improvements, particularly over the last few years in the way in which the growers have faced up to the issues confronting the industry, that much more needs to be done. And if we are going to get this commercial focus, if we are going to get the demand drive, then you have got to ask the question: are the growers equipped to respond to that? The other point that I would make, Kerry, is .....

KERRY O'BRIEN: I might add, I might suggest that the mere fact that you raised that question suggests that you already know the answer.

SIMON CREAN: Well, I think the report has come to a lot of conclusions about that, and what I want people to do is to digest the report in its totality. I do have views but I don't want to impose those without the opportunity for full open consultation. The purpose of setting up this report was to get an opportunity, if you like, through all of the industry input, for an independent assessment to be made as to what is needed. Now, of course the Government is going to have to respond to that; it's going to have to take on board the views of the interests in the industry; but importantly, it's going to have to look at some decisions it has taken in the past in relation to the industry.

KERRY O'BRIEN: And there are going to be fewer woolgrowers, aren't there?

SIMON CREAN: Well, I think that the last couple of years have seen that that has happened anyway, regardless of this report. I mean, you have seen things like drought and the like take people out, but that is always the case in this industry, but I think that what we have sought to do is to secure the base with the exceptional circumstances provisions, which the Government announced earlier this year, which are designed to keep the woolgrower, the specialist woolgrower, on the land. You see, you have got to understand, Kerry, that what this report argues is that we can improve the future of wool by increasing demand for it. If you are going to increase demand you have got to have a capacity to meet that demand. And what we have got to do is to sensibly use the stockpile in the interim period, treat it as an asset, and manage a situation in which we progressively expand demand, but in a way in which we can respond to that with the types of wools that are needed, and encourage a greater confidence by the grower that continuing to invest in the industry will produce returns for them over the longer term.

KERRY O'BRIEN; Andy Stoeckel, are you impressed by that element of the report that focuses on the need to develop more bilateral markets, particularly with developing countries, using Mexico as a way into North America via the NAFTA treaty, countries like India, and so on?

ANDY STOECKEL: Well, I mean, we should pursue all markets, and so on. You need to remember that actual greasy wool is traded very freely around the world and the big barriers are in the processed products, so as to the extent that Australia gets into processing our own wool and then having to export processed product, that those barriers matter. Of course, there's a whole lot of barriers on textiles and making clothing too dear, full stop, and so too few textiles are purchased by consumers right around the world, and Australia is just as bad there, and we have enormous barriers on textiles in this country, making men's woollen suits far dearer than they need be. So even in this country alone, the country that produces most of the apparel wool, we find men's suits are far too expensive, and consumption of woollen suits by people is too low. So you know, those bilateral efforts are very important, but we need to keep it in perspective. In fact, I remember very well putting up a proposal to go along and measure the cost of all these trade barriers to the wool industry, and being really .. .. by a very senior member of the Australian Wool Corporation that these costs, they didn't matter at all. So there is some irony here in this report and what it says.

KERRY O'BRIEN: Mac Drysdale, I am intrigued by the continued emphasis on generic promotion because there is an explicit assumption in that, that we can't promote Australian wool of itself, as a valuable item on overseas markets, to consumers.

MAC DRYSDALE: The generic promotion aspect of it, too many people see it as generic promotion versus a branded promotion, in other words, we can't have Woolmark and promote Australian wool at the same time. Now, quite clearly, that is not the case - they do complement each other. Our generic promotion, worldwide, is based around the Woolmark and it has been done by the International Wool Secretariat, and it's been quite successful. And I think that if you look at the comments today by Professor Garnaut, he claimed that they had been very successful if you look at Woolmark compared to other generic promotion activity that has occurred. I don't think it is necessarily a case of having one or the other - we can have both. In fact, the Australian Wool Corporation has been working very hard over a number of years in countries such as China and India and the CIS countries, where we have been building demand for Australian greasy wool, as Australian greasy wool, and I think that that is basically a branded-type approach. Now, we can do that as well as going out to the consumer and promoting wool as a generic product, as well.

KERRY O'BRIEN: Simon Crean, Garnaut disagrees with the Government on the level of the wool levy for next year. He says it should continue at 4.5 percent rather than the 8 percent that the Government wants to put on it. I imagine you would have some trouble persuading, even if you were convinced yourself, you would have some trouble persuading some of your Cabinet colleagues about forgoing some extra revenue.

SIMON CREAN: Well, it's not revenue to the Government ....

KERRY O'BRIEN: No, I know.

SIMON CREAN: .... of course, Kerry, and it goes to underpin the debt management strategy of the stockpile. But I think it's important to understand that if, in fact, we were arguing for the continuation of the management of the stockpile as it's been done in the past, then I think that there would be a very strong case for the continuation, or an increase in the levy. But what the report argues is that we need to treat the stockpile not just as a liability, but as an asset, and we need at the same time as addressing the management of the stockpile, to develop risk management strategies that the industry .... whereby the risk is shifted to the industry. See, at the moment, the risk essentially is shifted to government. Every time a crisis happens, we get calls for introducing more flexibility to the management of the stockpile.

I think that what is suggested here is a movement back to industry, but equipping the industry with risk management tools, and it is against that background of, I think, the recommendation on the tax needs to be seen. From our point of view, of course, we have not only got to take that into account but we have got to take into account the public interest which is the Government, if you like, carries the contingent liability. If there is default it is the taxpayer, the ordinary taxpayer that has to pick up the problem, so we have got to look at it from that perspective. But it is one of the issues that I think will be looked at hard and long by the Government, Kerry. I am not in a position to indicate specifically what we will do on that recommendation, tonight.

KERRY O'BRIEN: When do we see similar reviews and similar reforms in other major primary industries, like the meat industry?

SIMON CREAN: Well, the meat industry is one that I would hope to be announcing the details of a review in the next couple of weeks. Of course, the Industries Commission is already looking at the meat industry, but you talk about similar industries. Well, we have already done them in relation to the horticultural and food based industries for the clean food program; we have done them for dairy; we have done them for sugar. My approach has really been to not just produce reports, academically driven or otherwise, but to try and develop an approach with industry where industry understands the importance of change, the need to embrace change, but being involved in the process of change. And that has proven successful in the past. I think it is demonstrating a successful route in relation to the responses so far to this report.

KERRY O'BRIEN: Okay, a very brief question all round - is the wool industry, ever again, going to be as big as it once was?

MAC DRYSDALE: Yes.

ANDY STOECKEL: Well, I think it could be but the best promotion you can make is to cut costs and produce a higher quality. Wool contamination costs about $100 a bale and there's ways to make enormous savings through that marketing change, and we have proven that.

SIMON CREAN: Well, it can be, but it will not be if we continue to approach the industry as we have done in the past. We need a new approach. I think this report provides the basis for that approach and I urge the industry participants to get behind constructively developing that approach. We can have a strong future but we have to secure it, and I want to work with the industry to help secure it.

KERRY O'BRIEN: Gentlemen, thank you.