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Wool Marketing (Temporary Provisions) Amendment Bill 1991
House: House of Representatives
Portfolio: Primary Industries and Energy
To suspend the Reserve Price Scheme, provide for supplementary payments to wool producers and appropriate $300 million to fund payments. The Bill will also allow the Minister to issue guidelines to the Australian Wool Corporation (AWC) for reducing its debts and disposing of wool stocks, allow the Minister in certain circumstances to sack the directors of the AWC and appoint replacements, and extend the period for which the Commonwealth may guarantee AWC borrowings.
The Reserve Price Scheme (RPS) guarantees a minimum price for wool sold at auction in Australia. The objective of the RPS is to provide stability and predictability of prices for Australian wool at the maximum sustainable long-term level. Under the RPS, the AWC buys wool that fails to attract bids at or above the Reserve Price (also referred to as the floor price). Wool bought by the AWC is held in store until market prices rise, when it is re-offered to the market. The Reserve Price is set for each wool selling season by the AWC.
After reaching a peak of 1257 cents per kg (c/kg) in April 1988, wool prices have fallen with the market indicator averaging 722c/kg in the first eight weeks of the 1990-91 season. The market indicator is forecast to average 710c/kg in 1990, a decline of over 18% from the 1989-90 average of 870c/kg. The real value of wool exports in 1988-89 was $6.805 billion. Preliminary figures for 1989-90 estimate the real value of exports to total $4.037 billion, representing a fall of $2.768 billion. The real value of exports in 1990-91 is forecast to be $2.995 billion. Australian wool production in 1988-89 totalled 959 kilo tonnes (kt). Preliminary figures for 1989-90 estimate that production will reach a record 1029kt and is forecast to only fall marginally to 1019kt in 1990-91. Preliminary estimates for the total number of sheep shorn in 1989-90 is 215 million and the total is forecast to increase to 221 million in 1990-91. The preliminary estimate for the size of the national sheep flock in 1989-90 is 173 million and is forecast to fall by 5 million to 168 million in 1990-91. To support the RPS, AWC stocks have grown from 188 000 bales at 30 June 1989 to 4.64 million bales at 18 January 1991. AWC stocks are forecast to reach 5.7 million bales by the end of the 1990-91 season.
Between 1986-87 and 1988-89 the minimum reserve price for wool increased by 71% from 508c/kg to 870c/kg. It was announced on 31 May 1990 that the minimum reserve price for wool would be lowered to 700c/kg in the 1990-91 season. The fall in wool prices and increase in the AWC stockpile has been attributed to a number of factors, including an imbalance between wool offerings and trade clearances, rapidly increasing production with contracting demand, and poor management. A guaranteed, and relatively high, return due to the RPS has contributed to the increase in production outlined above.
The current down-turn in demand and maintenance of wool production levels is likely to, and has placed, the wool industry under a number of short to medium term pressures, including:
*a build-up in AWC stocks with corresponding stock holding costs;
*a run down in AWC funds with a need for outside borrowings and corresponding debt servicing costs; and
*a significant reduction in farm-gate returns.
A number of options have been canvassed by various commentators over the past 12 months that could alleviate the industry's current position, including:
*raising the wool tax to fund further purchases and stock holding costs;
*introduce a form of flexible reserves with the role of the AWC being similar to that of the Reserve Bank, in testing the strength of market pressures and influencing the actions of market participation the interests of a smoother market;
*suspending the 10c/kg premium for wools which have been additionally measured until the market recovers;
*abolishing the RPS;
*develop counter-trade (barter) agreements with other countries under which Australia would be able to trade wool for goods and services;
*replacing the RPS with a system of sale by `Dutch' auction;
*the AWC suspending sales until the market has recovered substantially; and
*the AWC increasing funding for wool promotion.
Initiatives which have been taken, or have been stated will be taken, by the Government and the wool industry to alleviate the industry's current position include:
*increasing the wool tax;
*establishment of a wool policy council;
*increasing the AWC's borrowing limit;
*imposing a surcharge on the wool tax;
*introducing export control and quota mechanisms;
*establishment of an inquiry into aspects of the arrangements for setting the minimum reserve price and the marketing and promotion of wool;
*reducing the quantity of wool which can be offered at auction;
*suspension of sales;
*institution of a sheep slaughter scheme;
*exempting carpet wools from the market support component of the wool tax and the RPS for a two year period;
*increasing promotional activities and exploring ways of restoring and increasing access to the Soviet and Chinese markets;
*lowering the minimum reserve price;
*temporarily suspending the RPS; and
*provide for supplementary payments to certain wool producers. (Note: The Government has announced that it will contribute $300 million in supplementary payments to wool producers who sell their wool during the rest of the 1990-91 season. The supplementary payments are intended to make up the difference between open market prices for wool and what would have been received under the 700c/kg floor price.)
Since the introduction of the RPS in 1974 there have been two periods during which there has been a significant down-turn in world demand and the AWC has accumulated large stockpiles of wool. In 1974-75 stocks built up to 1.87 million bales. Recovery of the world market for wool in 1976 boosted demand and stocks were dissipated within five years. Between 1981-82 and 1983-84, stocks built up to 1.59 million bales. This stockpile was dissipated within four years following a recovery in the world market for wool. These experiences suggest that dissipation of the current stockpile will take a considerable number of years.
The initial reduction in the floor price to 700c/kg, the rise in stockholdings and the increase in the wool tax has been forecast by ABARE to lead to a decline in farm returns from wool of over 33% in 1990-91. In addition, the introduction of wool marketing quotas and a possibly higher wool tax would also mean a further fall in farm incomes. ABARE estimates that a quota of 750kt and a wool tax of 35% would result in the farm cash operating surplus of sheep specialists falling from the forecast $9500 for the 1990-91 season to a loss of $3700 in 1991-92. 1
The initial response of certain industry organisations, certain political spokespersons and certain media commentators to the Government's decision to suspend the RPS has in large part been to label the Minister and the Government as the architect of the industry's problems, provide worse case scenarios of the effect of the suspension, or view the maintenance of the 700c/kg floor price as a panacea to the industry's problems. For the most part, these initial responses are unsupported one line statements which offer few, if any, alternative courses of action to that taken by the Government to solve the industry's problems. 2
The effect of clause 3 will be to extend the period for which the Commonwealth may guarantee AWC borrowings beyond the current limit of 1 July 1992.
A new Part X (proposed sections 138-148) dealing with supplementary payments to wool producers, appropriation of funds for the payments, AWC debt reduction and stock disposal, suspension of the RPS, and the sacking of AWC directors and appointment of replacements will be inserted into the Wool Marketing Act 1987 by clause 4.
The effect of proposed sections 140-143 will be:
*to allow the Minister to issue guidelines for supplementary payments to wool producers;
*require the AWC to make payments to wool producers in accordance with the Minister's guidelines. Payments are to be made from the Market Fund, and will not necessarily be limited to the funds appropriated by this Bill;
*appropriate $300 million from the Consolidated Revenue Fund for supplementary payments to wool producers;
*require the AWC to keep accounts of Commonwealth funds provided for supplementary payments to wool producers in accordance with the Minister's guidelines; and
*suspend the RPS until a date to be proclaimed.
The effect of proposed sections 144-146 will be:
*to allow the Minister to issue guidelines to the AWC for reducing debts which have arisen from its borrowings;
*require the AWC to borrow money and discharge its borrowing debts in accordance with the Ministers guidelines; and
*require the AWC to sell or dispose of wool stocks in accordance with the Ministers guidelines.
Basically, proposed section 147 will allow the Minister to sack the directors of the AWC where the Minister believes the AWC is not effectively exercising its powers or performing its function or duties, or is unable to for a quorum at meetings because of vacancies in its membership, or directors do not attend meetings. Where directors are sacked, the Minister may appoint a full-time or part-time Chairperson and six part-time Directors, or five part-time Directors and a full-time Managing Director, or an Administrator. Proposed section 147 will cease to have effect on 1 July 1992.
1. The statistics used in the `Background' to this Digest come from the following sources:
National Agricultural and Resources Outlook Conference 1991, Prospects for Wool and Wool Marketing, January 1991, pp. 1-7; and the Australian Bureau of Agricultural and Resource Economics, Agriculture and Resources Quarterly, Vol. 2, No. 4, December 1990, pp. 390-393.
2. These conclusions were arrived at by examining 53 newspaper reports, wire service reports, transcripts of doorstop interviews and media releases of 11/2/1991-13/2/1991.
Bills Digest Service 15 February 1991
Parliamentary Research Service
For further information, if required, contact the Economics and Commerce Group on 06 2772460.
This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.
Commonwealth of Australia 1991
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Published by the Department of the Parliamentary Library, 1991.