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Thursday, 28 October 1993
Page: 2708


Senator TAMBLING (11.09 a.m.) —The package of eight bills before us will reshape the wool industry along the lines recommended by the Wool Industry Review Committee, known as the Garnaut committee. The aim is to reduce to two the number of bodies dealing with wool—one for promotion, research and development and the other to pay off the debt and reduce the stockpile by selling a predetermined amount of wool. When the debt is less than the value of the stockpile—hopefully by mid-1997—the latter body, called Wool International, will be privatised and owned by the very people who paid the debt taxes.

  A glance at the history of the wool industry reserve price scheme reveals that it operated for some 20 years before encountering a combination of difficulties in the early 1990s. These difficulties can be traced back to the 1980s, when prices for wool at auction increased dramatically, peaking at around 1,100c per kilogram. The reserve price, instead of being synchronised with the long-term price trend, was increased by about 60 per cent over two years to 870c a kilogram, where it remained for two seasons.

  This increase effectively converted the reserve price scheme into a price setter and altered the price ratio of wool relative to other fibres. Instead of wool being around its historical price level—three times as dear as cotton—it became six times as dear as cotton, causing trade to shift to other fibres. Unfortunately, this shift coincided with the start of the world recession and the break-up of the old Soviet Union.

  Figures show that in 1950-51 the total world production of fibres was around 10,332 million kilograms, with wool holding around 10 per cent of the market; man-made fibres, 16 per cent; and cotton, 74 per cent. By 1991-92, the total world fibre production was 39,151 million kilograms, with wool accounting for just 4.4 per cent; man-made fibres, 45.1 per cent; and cotton, 50.5 per cent. The floor price for wool meant that it was the most profitable farming enterprise with a guaranteed return and, as a result, many grain and beef farmers started running sheep.

  Production rose rapidly, from 700 million kilograms in the late 1970s and early 1980s to 1,100 million kilograms in 1989-90, when 5.7 million bales were offered for auction. The Australian Wool Corporation bought almost three million bales, or 52 per cent of the clip, that year. In 1990-91, production was 1,066 million kilograms, with 5.4 million bales offered for auction, and the AWC bought almost two million bales, or 35 per cent of the clip. The federal government moved to lower the floor price to 700c in 1990 and by February 1991 had scrapped it altogether.

  For equity reasons, the government continued to assist growers who had to sell their wool for that season. The cost to the federal government was $300 million. By that time, not only had the Australian Wool Corporation spent the $1.8 billion of growers' money it had in reserve but it had also borrowed $2.9 billion. The stockpile reached 4.5 million bales.

  The federal government then formed the Australian Wool Realisation Commission to handle the disposal of the stockpile and to pay off the debt. It was determined that woolgrowers, although being required to pay off the debt, would cede ownership of the stockpile to the commission. The government established also a research and development corporation and the separate Wool Corporation to handle promotion and quality control. AWC stocks were frozen for the remainder of the 1990-91 season, with the exception of some long-term contracts and processed wool in stocks overseas. The government also gave the AWRC $22.5 million a year for two years to prevent it from having to hold a fire sale of its non-wool assets. A seven-year fixed repayment schedule was established. The schedule, which provided for annual payments ranging from $20 million in 1991-92 to $559 million in 1997-98, aimed to clear the outstanding debt.

  The system worked well for the first 12 months, putting the commission ahead of schedule. However, a significant decline in prices over the following 12 months led to renewed speculation about a fire sale. The federal government tried to overcome the problem by adding a year to the fixed disposal schedule and declaring that nothing had to be repaid this financial year. The debt is now $2.2 billion, the stockpile is 3.9 million bales, and production, estimated at 690 million kilograms, is still falling.

  In order to quash continued fire sale speculation—and encourage the market to forward buy—this legislation adopts the Garnaut committee's suggestion of a fixed disposal schedule, rather than a fixed debt reduction schedule. The legislation also provides for fewer statutory bodies by combining the AWC and the AWRDC into one body called the Australian Wool Research and Promotion Organisation, and abolishing the Wool Industry Council.

  AWRAP will be responsible for the allocation of research and development funds and generic promotion, while other functions will go to industry or government or be abandoned. The organisation will be encouraged to seek partnerships with commercial research and development ventures and to commercialise results as quickly as possible so that industry can obtain royalties, patents and other benefits to help fund further research. The $20 million given by the government this year for wool promotion runs out on 30 June. The minister has already said that the government will not provide further funds. However, I remind the government that in its primary industry policy for the last election it promised to ensure that the industry had sufficient funds for promotion.

  The International Wool Textile Organisation said that it was prepared to put in $100 million for generic promotion, but has since reneged because the government and, indeed, the coalition are not prepared to introduce a wool export tax. Such a tax would end up being paid by growers rather than processors. However, if the wool industry is to get out of this mess it must sell its stockpile, and promotion is desperately needed to help with this task. The government should look again at funding promotion.

  The other major body to be set up under this legislation is Wool International, which will manage the sale of the stockpile and the payment of debt. Initially, it will be a statutory body. Legal advice is that, under company law, if the debt exceeds the current value of assets the directors are obliged to call in a liquidator. Eventually, Wool International will be corporatised and then privatised by issuing shares to the people who have paid the 4.5 per cent wool tax since July 1993. The target privatisation date, pending legislation, is July 1997.

  Wool International's immediate task is to develop risk management tools, such as futures markets, wool bonds and options, as well as introduce total quality management programs. Apparently the minister plans to establish Wool International as soon as legislation is passed to allow it to take over from the Australian Wool Realisation Commission. This will allow more time to develop forward selling and risk management tools and ensure that it is ready to start the fixed disposal of the stockpile from 1 July 1994.

  Wool International will have to make a simple public statement, monthly and then quarterly, on its compliance with the disposal schedule, but not in relation to stockpile management. It will report confidentially and regularly to government while the government guarantee is in place or, in other words, until Wool International is privatised. Far from being a day-to-day trader or market speculator, Wool International will have the power to buy in wool only in specific circumstances where sales exceed fixed disposal requirements.

  The government will continue to guarantee the borrowings and will include the hedging activities of Wool International, as these are related directly to the financial management of the stockpile. The guarantee will not apply outside stockpile management. The minister has agreed that, if the debt is reduced sooner than anticipated, as would be the case if the price increased dramatically, Wool International can be privatised earlier.

  The Garnaut committee considered six options for dealing with the stockpile and found that the long-term demand for wool would improve if at least half the stockpile were sold off rather than destroyed. The rationale is that Australia will find new customers and new uses for wool and thereby increase wool's total share of the world apparel market.

  Under arrangements outlined in this legislation, speculators will hopefully see that there is money to be made in wool and start to invest. There will be no such investment if people are worried about the possibility of wool being dumped on the market to meet a repayment schedule. My colleague in the House of Representatives, the honourable member for Corangamite (Mr McArthur), put it thus:

The Garnaut report now moves the wool industry into the commercial world. I hope the future of the wool industry is secure after 1997 with few statutory bodies; with quality standards enforced at the shed level and through processing; with wool growers maintaining their 4.4 per cent of the total fibre market; and with a free market for wool with no levies imposed by either the government or their own organisations.

  I now wish to turn to the amendments that were moved in the House of Representatives. I am pleased that those amendments, which were foreshadowed by the coalition, were accepted by the government following negotiations with the coalition and input from the Wool Council of Australia. The amendments included the creation of selection committees to nominate persons suitable for ministerial appointment to the boards of Wool International and the Australian Wool Research and Promotion Organisation, with the Wool Council nominating one member for each selection committee. Previously the minister was to appoint all board members. The amendments also included the retention of provisions allowing the Commonwealth to contribute money for wool promotion. Originally these were to have been phased out. The amendments also include calling on AWRAP, which is wholly funded by grower levies, to consult with the Wool Council of Australia regarding its operations, and extending the deadline for AWRAP to divest its quality management functions by one year to 1 January 1996.

  Finally, I would like to reflect on the Senate's Rural and Regional Affairs Committee, which last week heard views from various people in government and industry ranging from selling the stockpile for 150c a kilogram to wanting none of the stockpile sold unless it made 600c a kilogram. Economist Mr Henry Haszler told the committee that wool used in insulation batts had sold at $1.50 a kilogram and that such alternatives were, in his words, `worth considering' in relation to the stockpile. By contrast, Mr Gregory Walcott of the Balmoral branch of the Victorian Farmers Federation argued that the break-even price for growers was about 600c. His counterpart, Mr Allan Small, also expressed concern about the level of wool debt and advocated that the government and industry take on, in their words, `combined responsibility'. Perhaps Professor Ross Garnaut best summed up the situation when he told the committee:

  The preparation of the report itself and the subsequent discussion have occurred against a backdrop of deep economic travail in the wool industry and in rural Australia, and that made us very much mindful of our heavy responsibilities. We did not find a magic wand to wave and cure the problems.  We did come up with a set of recommendations which, we judged, if implemented consistently and effectively, would give us the best path out of the current difficulties. Always judgments were on a balance of probabilities because there was no magic wand and there are uncertainties, but we were confident about our path being better than alternatives.

Despite many submissions, there were no new workable ideas at that hearing or at the 25 meetings held around Australia by the coalition shadow minister for primary industry, Mr John Anderson. We are pleased that the government has already accepted our amendments and that the Senate committee has returned the legislation without amendment. For these reasons, the coalition supports this legislation.