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Jim Sutton Speech - Wool Board AGM, Napier

Office of Hon Jim Sutton
Speech Notes 29 October 2001

Wool Board AGM, Napier


Chairman Bruce Munro, ladies and gentlemen: As a long-time wool producer, as well as the holder of two significant economic portfolios, I appreciate the opportunity to attend part of your conference and to convey to you some of my own views.

This is crunch time. Your industry stands at the crossroads. One side, oblivion. The other, chaos.

Which way will you go?

>From reading newspaper reports of your industry, you would think that the wool industry is in total crisis, that earnings are virtually nothing, that wool is no longer an important product for New Zealand.

But wool is an important product for New Zealand.

New Zealand is the second largest producer of wool on a "clean" basis in the world, and produces 14 per cent of world production.

Wool fibre export earnings for the year ending June last year were $801 million. Wool textile exports were another $241 million during that time, with sheepskings and sheepskin products contributing a further $52 million.

So in total, wool and wool products earned almost $1.1 billion dollars ? 4.2 per cent of the total value of New Zealand merchandise exports.

That's not an insignificant amount.

The New Zealand economy has traditionally lived off the sheep's back, from both wool and meat. Apart of a surge from dairy, not too much has changed.

Perhaps that's part of the problem.

The wool industry has been suffering from declining returns for many years now, and not surprisingly growers are demanding change.

It is of course easy to blame problems in the wool industry on marketing structures and on the Wool Board itself. I do not, however, believe that the Wool Board and its promotion and marketing structures are principally to blame for declining industry prosperity.

Wool has lost market share, and has declined in profitability mainly because the industry has failed to keep pace with technological change and new product development in the synthetic fibre industries.

Huge research and development investment internationally has driven product innovation and improvement in synthetic fibres. This innovation has reduced the price of synthetics, and, above all, improved their performance characteristics. This, in turn, has meant that textile manufacturers have directed their investment into new machinery suited to synthetics and not wool.

You can see that change here, in New Zealand. What do people wearing casual or sporting clothing put on when they get cold? It's probably a cotton sweatshirt or a polar fleece pullover made from recycled plastic. If you're lucky, it's an Icebreaker jersey made from finely-knitted merino wool.

It's rarely that basic woolen sweater that everyone used to wear all those years ago.

Wool is now a fashion item, one among many, not the automatic choice.

I think there are some lessons in a comparison between the wool industry and the sheep meat industry of the early 1980s.

At that time, the meat industry was grappling with low prices, weak demand, and declining competiveness compared to white meats and other alternative products. Sheep meat was seen in some markets as tough, smelly, and poorly presented. It was often cut to unappealling specifications and was of uneven and sometimes unsatisfactory quality.

Some farmers in the 1980s felt there was no future in meat and it might be better to move into all wool farming?

Now, in 2001, the sheep meat industry is profitable.

Part of this is due to marketing entrepreneurship and changed industry structures. However, I believe the major factor in sheep meat profitability has been the improved eating quality of our lamb exports, together with enhanced packaging, presentation, and cuts that appeal to changing consumer needs. This has been achieved through niche market development, greater responsiveness to customer demand, technological advances in meat tenderness, consistent quality, and chilling and packaging innovation.

Ladies and Gentlemen: if you take away nothing else from my speech today, remember this part.

As minister of agriculture in this Labour-Alliance government, it doesn't matter too much what I think of your industry's structures. You keep working on whatever you think is the best model for your industry.

Labour policy is quite clear on producer board reform. If you bring me changes you want to implement that are supported by a majority of industry players, are fair to minority interests, and are in the national interest, then I'm here to facilitate that change through the necessary legislative process.

We are not driven by ideology to force-feed farmers with the demolition of co-operative structures and discourage collective provision of industry good services.

So far in the term of this government, you've seen that facilitation for the dairy industry, the kiwifruit industry, and the pipfruit industry. I'm pretty relaxed about the general thrust of the reforms to industry structures that have been endorsed by farmer referendum, including the dissolution of the Wool Board. And I'm reasonably content with the management of the reform process so far ? a far more difficult task than some critics appear to appreciate.

But what I am concerned about is your industry's views on promotion, and on research and development.

If you make decisions to do away with any spending on either of those two areas, then make sure you are all fully aware of what you're doing. If you don't fund it, in my view it would be unsafe to expect that anyone else will.

Yes, it's hard to measure the benefits of promotion ? you can't scientifically prove that spending x million amount of promotion nets you y million amount of revenue.

But seriously ? how many successful industries and companies around the world with something to sell do you know of that don't advertise and otherwise promote that product??

Also, I'm not impressed by the urge apparently felt by some to demolish as much as possible of the public good research and development of the Wool Board.

I disagree with the theory that farmers should only spend on on-farm production research and development work, and that research and development aimed at increasing demand beyond the farm gate be abandoned. If farmers expect others to pick up that, then I fear for your industry. More and more of your place in the market will be taken over by synthetics, who understand the value of not only research but have the commitment to promote to the end consumer.

The competiveness of the wool industry will not be enhanced by focussing on only on-farm productivity and minimising the levy burden on farmers. Pastoral agriculture in many parts of South America provides examples of farmers focussing on their farming operations and not being prepared to support initiatives further down the value chain. But anyone who has visited South America knows that they envy our relative success, which they attribute in large measure to our collectivist institutional structures.

WRONZ has a tremendous track record in wool industry innovation. It has been critical to keeping wool in the game, in the face of the dramatic advances of its synthetic competition. It is important in my view for the industry to capitalise on its intellectual property and to sustain its investment in wool products, process innovation, and carpet technology.

Without ongoing innovation in the carpet industry, it will be difficult for wool to continue to compete with synthetic carpets, and this could endanger a market for around 75,000 tonnes a year of New Zealand strong wool production.

Some people may say that the wool industry cannot match the amount of research effort from the synthetics industry, and should stop trying to compete. However, an important feature of research and development innovation is that it is not always scale dependent. Often the major advances come from small players who think outside the square, who are fast moving, or who are better able to spot and exploit a new market niche.

It is also important to recognise that farmers' levy payments are not the only funding source of wool industry research and development.

Private sector research and development in this sector do not stand alone, and decisions you make can have implications for the funding contributions Government makes.

Public funding of wool and other agricultural research is conditional on the industry being prepared to at least maintain, and preferably enhance, its investment. If an industry reduces its research and development investment, then you can expect the Government may do so as well. If industry does not have the confidence to put money into research and development, then that gives an obvious signal to others, including the government.

Ladies and Gentlemen: no-one can claim it will be easy to turn the wool industry around and restore its profitability.

However, the certainty is that if the industry focuses only on incremental cost reduction on-farm and minimising levy payments, then its future could well be bleak. It would not be unreasonable to anticipate wool slipping to the status of a fashion-dependent alternative outside the mainstream of certain market segments. Not unlike angora fibre, or even ostrich feathers: occassionally valuable, but also frequently surplus to requirements.

Entrepreneurship, niche market development, and an expanded effort in research and development innovation could pay considerable dividends for your industry.

Merino growers have benefited from links with leading edge Italian fashion designers, who demand extremely high quality fibre for top of the range applications. Blends of possum fur and merino wool, while a small niche market, have shown that even pest problems can be turned into market opportunities. The mid-micron market was dismissed in the McKinsey report, but subsequent analysis has shown some potential in markets that value environmentally sustainable fibre production.

Reducing the cost of wool production will not by itself restore industry fortunes.

What is needed is innovation to improve the characteristics of wool, to enhance its appeal to consumers, to produce new wool-based products, and to produce technologies that allow wool to compete in new and in higher value markets, perhaps even in non-textile markets.

As growers, the decisions you take today and over the next couple of months, will have significant implications for your future business ? and our country. I urge you to give them careful consideration.

Thank you.

ENDS

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