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The wool industry - looking back and forward
New South Wales is the main wool producing state, with over 36% of the national flock. The next most important state is Western Australia, which currently accounts for about 22% of the flock. Victoria accounts for about 19%, followed by South Australia with 12%.
Almost all wool produced in Australia is sold through the public auction system, conducted on behalf of growers by wool brokers and held at one of the five major wool selling locations situated around Australia. All wool is tested prior to auction by sending a sample of the wool to the Australian Wool Testing Authority, which provides details of the micron, strength, percentage of vegetable matter and other characteristics of the wool. This enables buyers to objectively assess each wool lot offered for sale by the broker prior to the auction to ensure that the wool purchased will meet the buyers' specific requirements. A small but growing proportion of wool is sold outside the auction system, either through brokers or directly by producers.
The main sheep breed in Australia is the Australian Merino, accounting for around 75% of all sheep. Another 12% are first cross ewes (predominantly Merino x Border Leicester) which are used for producing high quality prime lambs (lambs for meat) by mating the ewes with short wool British meat breed rams. A further 9% are merino-derived dual purpose breeds and Comebacks, developed in high rainfall areas for the production of wool but combined with a more acceptable meat carcass than pure merinos. The balance of the flock are British breed sheep: long wool breeds used to breed prime lamb mothers (mainly Border Leicesters, but also Romney Marsh and Cheviots), and short wool breeds used for producing prime lambs (Poll Dorset, Dorset Horn, Suffolk, Southdown and South Suffolk).
Development of the Australian Merino
The Australian Merino is recognised worldwide for its ability to produce pure white wool which is soft and fine but strong. No other breed can match the fineness and softness of the fleece produced by the Australian Merino. A number of strains have been developed within the Australian Merino breed, notably the Peppin strain (developed in the 1860s by the Peppin brothers in the Riverina district of New South Wales) and the South Australian strain (developed along similar lines to those used by the Peppin brothers, but with an emphasis on larger body size and stronger wool).
The Peppin brothers initially chose the best 200 of 6,000 ewes on their property to commence their breeding program. These were crossed with a Rambouillet ram from the United States of America, which produced outstanding progeny with high yielding medium fine wool. Merino rams from Germany, Vermonts from United States of America and Lincolns from England were also used by the Peppin brothers in developing their strain of sheep. Similar exercises were repeated around Australia, but were fine tuned to match local environmental conditions. For example, high rainfall areas better suited the use of Lincoln and merino sheep, while in South Australia the English longwool sheep were used to produce larger, more robust sheep able to withstand hot arid pastoral conditions.
There are four main types of merino in Australia. These are the superfine merino (18 micron fibre diameter or less), the fine wool merino (19 micron fibre diameter), the medium wool merino (20-22 micron fibre diameter) and the strong wool merino (23-25 micron fibre diameter). Climatic, geographic and management factors determine the distribution of these types throughout Australia. In general, finer woolled sheep grow best in the cooler areas, where feed is consistently scarce and sheep can be managed intensively. Stronger woolled sheep, on the other hand, grow better in the harsh hot low rainfall areas, where properties are large and the level of management is less intensive.
New South Wales has a range of excellent sheep growing areas, from the cooler southern and northern tablelands areas suited to superfine sheep, to the more temperate inland pastoral areas suited to medium woolled sheep, through to the semi-arid and remote western pastoral areas suited to strong woolled sheep. Western Australia tends to produce wool of medium micron grade, as most of its production is contained in the more temperate pastoral areas of the south-west of the state, while comparatively harsher conditions in the South Australian and Queensland sheep-growing regions tend towards the production of stronger woolled sheep. Like New South Wales, Victoria produces a wide range of wool types, while Tasmanian production tends toward the finer end of the scale.
Development of the merino is ongoing, and merino wool is progressively becoming finer, due to selective breeding of those sheep with high quality fine wool. According to data released by Australian Wool Exchange Ltd, the proportion of wool offered for auction measuring less than 19 micron has increased from 10.5% in 1993-94 to 19.6% in 2000-01.
By 1820 the number of sheep in Australia had reached approximately 120,000 and consisted mainly of meat sheep from the Cape of Good Hope, India, England and Ireland, and their resultant crosses. At this stage only around 30 merino sheep had been imported into Australia. However, the importation of around 5,000 merino sheep in the 1820s and their eventual crossing with the local sheep flock laid the foundations for the Australian wool industry.
During the next 30 years the pastoral industry expanded into newly opened lands in and around Sydney and beyond the Blue Mountains in New South Wales, as well as districts further afield such as Port Phillip and Portland Bay in present day Victoria. Imports of sheep continued to grow as the demand for sheep meat and wool increased in Australia and Great Britain.
By 1840 imports of sheep into the Colony of New South Wales reached 20,000, and in 1848 exports of sheep had reached almost 90,000. In the same year, 5,657 tonnes of wool, valued at £683,623, were exported to Great Britain from New South Wales, which at that time included the areas of Queensland and Victoria. By the end of 1850 sheep numbers across Australia had reached 16 million, or around 39 sheep per head of population, compared to around 6 sheep per head of population today.
Sheep numbers grew a further 25% during the 1850s, reaching 20.1 million in 1860. In 1852 the Colony of Victoria boasted 6.5 million sheep and was exporting 9,112 tonnes of wool with an estimated value of £1,062,787. By the latter half of the 19th century the wool industry had taken on a life of its own. Sheep numbers increased rapidly, from 20.1 million in 1860 to over 106 million in 1892 (graph S16.2). Over the same period wool production increased nearly tenfold, from 26,753 tonnes to 289,380 tonnes, as fleece weights increased with the development of improved strains of sheep.
Economic and climatic problems, culminating in the depression of the 1890s and the prolonged drought of 1895-1904, seriously affected wool production towards the end of the 19th century. Sheep numbers fell from 106 million in 1892 to 54 million in 1903 - a 49% fall. Droughts continued to affect the pastoral industry in the early part of the 20th century and caused significant periodic drops in sheep numbers.
Wool producers were given some respite when, during the First World War, all Australian wool was purchased by the British Government at 55% above pre-war values. However, it took about two decades for sheep numbers to be restored to the levels of 1892, when in 1926 sheep numbers rose above 100 million once again.
By the mid 1920s the United Kingdom was purchasing about 50% of Australia's total wool exports, up considerably on the pre-war figure of 30%, with wool exports accounting for three-quarters of all pastoral export income (which included live cattle and sheep, meat, wool and hides). By the late 1920s Australia's 103 million head of sheep produced 440,000 tonnes of wool and accounted for 17% of the world's sheep numbers. During this time Australia produced just on half of the world's merino wool.
In the 1930s exports of wool comprised approximately 30% of the total value of Australia's exports of merchandise trade, earning £46.9m in 1937-38. By the outbreak of the Second World War the demand for wool by Britain had increased substantially. The Australian and British governments entered into a number of contracts to purchase Australian produce including wool, mutton and lamb at agreed prices. In 1939 the governments of the United Kingdom and Australia arranged for Britain 'to acquire the Australian wool clip for the duration of the War and one full wool season after the cessation of hostilities', surplus to requirements of Australian manufacturers (Year Book of Australia 1940, p. 962).
In fact, during the war years net exports of wool (exports minus imports) fell from 386,000 tonnes in 1938-39 to 262,000 tonnes in 1944-45, a drop of 32% in seven years. However, net exports reached pre-war levels the following year, when the Australian war effort cut back its use of wool.
At the end of the Second World War the stock of Australian, New Zealand and South African wool in the ownership of the United Kingdom Government was 10.4 million bales. At a meeting of officials from each country held in London in April-May of 1945, the four governments formed a joint organisation called, U.K. Dominion Wool Disposals Limited, to market and sell the stockpile, together with future clips, in an orderly fashion to ensure the stability of wool prices. By the end of 1951 all of the stockpile had been sold, as well as the wool bought in by the organisation at the floor price. On 22 January 1952, the joint organisation was voluntarily liquidated. Distributions to Australian wool growers of the profits arising from the transactions of the joint organisation in Australian wool were £23.6m in November 1949, £23.6m in March 1952 and £15.1m in March 1953.
Prosperity in the wool industry peaked in 1950-51 when the average greasy wool price reached 144.2 pence per pound, (equivalent to around $37 per kilogram in today's prices, compared to around $3.20 per kilogram being achieved in mid 2002 (graph S16.3)). This was nine times greater than the 1945-46 United Kingdom contract price, and almost 14 times greater than the average for the 10 seasons ending in 1938-39 (10.39 pence per pound). This short-lived but extreme increase in price was due to the American demand for wool which was generated by the Korean War.
During this period Australia was said to be 'riding on the sheep's back'. In 1950-51 the gross value of wool production had increased to 56% of the total value of production of all agricultural industries, compared with 17% in 1945-46. The increase in the price of wool during this period led to a sharp increase in sheep numbers, from 96 million in 1946 to 113 million in 1950.
The industry after the golden period
The period of high prices did not last, and returns for wool quickly fell away. In 1951-52 returns were half those received for the previous year. While small rises sometimes occurred over the next 20 years, wool prices generally continued to fall until 1970-71, when the price fell to $0.60 per kilogram (equivalent to $4.32 in 2001 prices).
By 1970-71 wool production contributed only 15% to total gross value of agricultural production. Over most of the 20 year period up to 1970, wool producers made reasonable profits compared with other agricultural industries, and the number of sheep and quantity of wool produced continued to increase. However, there were underlying concerns within the industry about the general decline of wool prices, and these resulted in a number of attempts to stabilise prices over the period. In 1970 when wool prices bottomed, a record 180 million sheep were producing approximately 890,000 tonnes of wool.
A Wool Deficiency Payments Scheme operated for two years from 1971, after which the Australian Wool Corporation (AWC) established a minimum reserve price scheme, which operated between 1974 and 1991. The aim of the scheme was to stabilise future large movements in wool prices by purchasing wool which did not achieve the agreed floor price and then selling wool later in times of buoyant demand. However in the early 1990s a combination of sharp falls in demand and high reserve prices (set during a period of high demand in the late 1980s), resulted in the scheme being suspended in February 1991, when the size of the AWC stockpile had reached 4.7 million bales. The Government, with the agreement of the industry, decided that the scheme could no longer be maintained.
The Australian Wool Realisation Commission was initially responsible for the disposal of the wool stockpile. In December 1993 the disposal of the stockpile became the responsibility of Wool International (WI), a statutory corporation of the Commonwealth Government. WI was required to sell the stockpile in accordance with a statutory imposed disposal schedule, with the last bale of stockpile wool to be sold by 30 December 2000.
At 30 June 1998 the stockpile had been reduced to 1.2 million bales. By October 1998 equity in the wool stockpile had reached a level significantly higher than the level of debt in the wool stockpile, and therefore, ongoing government involvement in stockpile management was no longer justified. As a result the Government announced a freeze on sales of wool from the stockpile in mid October 1998 and announced its intention to privatise WI by 1 July 1999. On this date WI became WoolStock Australia Limited, a public company limited by shares allocated to previous holders of unit equity in WI. WoolStock Australia took over the assets and liabilities from WI and was fully accountable to its shareholders for the efficient management and sale of the stockpile.
On 9 August 2001, WoolStock Australia was able to report that the last bales from the stockpile had been sold. This meant that future sales of wool would again operate under free market principles and that artificially set prices would no longer have an impact on the price of wool received by Australian growers.
It was during the 1990s that the Australian wool industry came to fully realise that wool is merely one of a number of fibres which apparel makers can choose to use in their garments, and that demand for wool depends significantly on the relative prices of substitute fibres, particularly the high quality but cheap synthetic fibres being produced today.
Over the last decade, world consumption of wool has declined by 10% from an average annual consumption of 1.76 million tonnes in the 1980s to 1.59 million tonnes in the 1990s. This decline occurred while total consumption of apparel fibres, including synthetics and cotton, was rising. In 1998, total world fibre consumption was around 46 million tonnes, with synthetics comprising 49% of this figure, cotton 42%, cellulosics 5% and wool only 3%. During the 1990s most of the growth in total apparel fibre consumption was in synthetic fibres and cotton, which grew by 6% and 2% a year respectively.
Wool is a more expensive fibre to both produce and process than cotton or polyester, with production and processing (up to the yarn stage) estimated to be around three times more expensive. In addition, the price of wool fluctuates with changes in both supply and demand. Nevertheless, most organisations in the textile industry still view wool as one of the most important apparel fibres and one which will always have a future in the textile industry.
In 1971-72, the year after wool prices bottomed, the estimated turnover of the specialist wool producing industry was $480m. This had risen to $4.3b in 1989-90, but by 1999-2000 it had fallen to $1.7b, a decrease of 60% in 10 years. By comparison, turnovers for the beef industry and grain industry in 1999-2000 were $3.2b and $4.2b respectively. On average in 1999-2000, the turnover of specialist wool growing businesses was $153,400, while specialist beef businesses and grain growing businesses had turnovers of $233,000 and $315,000 respectively, with the average turnover of all farm businesses estimated at $275,000.
Farm profitability in the wool industry has always been cyclical and dependent on fluctuating wool prices, export markets and weather conditions. Cash operating surplus (the cash surplus before the deduction of depreciation and income tax and before operators of unincorporated businesses have drawn a wage) for the specialist wool producing industry was $315m in 1999-2000, with the average specialist wool growing business achieving a surplus of $28,100, a decrease of 39% from the average of $46,000 in 1989-90, and almost double the value achieved in 1998-99 (graph S16.4). Average cash operating surplus for specialist beef businesses and grain growing businesses in 1999-2000 was substantially higher than achieved by specialist wool businesses, at $54,200 and $55,500 respectively.
Net worth (assets less gross indebtedness) of the specialist wool producing industry in 1999-2000 was estimated at $11.1b, compared with $17.0b in the grain industry and $21.3b in the beef cattle industry. Return on net worth for wool producers climbed from 1.5% in 1998-99 to 2.8% in 1999-2000, compared with 4.6% for all Australian farm businesses in 1999-2000. The rate of return on farm business assets for wool producers was 2.4% in 1999-2000 compared with 3.2% for beef producers and 3.5% for grain growers. When looking at return on farm operating cost (cash operating surplus divided by operating costs) the specialist wool producing industry managed to generate 21.5%, that is, for every $100 a wool producer expended on operating costs, $21.50 of cash operating surplus was generated, compared with 20.7% for the grain industries and 28.2% for beef producers.
Major wool markets
In the decade to 1999-2000, Australian greasy wool production fell by 35%, from over 1.0 million tonnes in 1989-90 to 694,000 tonnes in 1999-2000. In the 12 months to June 2001, wool production decreased a further 7% to 645,000 tonnes. On the other hand, total exports of wool (which include raw, semi-processed and wool on skins) have fluctuated around an average of 815,000 tonnes per year (expressed in a greasy wool equivalent) over the 10 years from 1990-91, with the figure for 1999-2000 being approximately 800,000 tonnes. The value of wool exports fluctuated around $3.5b over most of the 1990s before dropping sharply from $4.0b in 1997-98 to $2.6b in 1998-99 and then back up to $3.9b in 2000-01.
Wool markets in the early to mid 1990s saw an excess of production, steadily declining world prices and strong competition between natural and synthetic fibres. However, in more recent times the consumption of wool has exceeded production, due to a decrease in the size of the sheep flock, and healthy demand as a result of a comparatively low Australian dollar. Australia's wool exports increased by 20% in value terms to $3.0b in the 12 months to 30 June 2000, as a result of significant rises in prices during 2000. In the 12 months to 30 June 2001, the value of exports increased a further 31% to $3.9b.
Over the last two decades trade between Australia and China has increased substantially, with China becoming Australia's single largest wool market (graph S16.5). Today China purchases just over a third of Australia's exports of raw and semi-processed wool, importing $1,360m of Australian wool in 2001. The European Union also accounts for about a third of Australia's wool exports by value, importing approximately 30%, with Italy by far the predominant purchaser of Australian wool in the EU. The Republic of Korea, France and Germany are the next most significant purchasers of wool, together accounting for approximately 15% of Australia's wool exports. While there has been growth in wool exports to China and other South East Asian countries over the last decade, the contribution of wool exports to Australia's total merchandise exports fell significantly, from 5.8% in 1991 to 3.0% in 2001.
Outlook for the industry
At mid 2002, the fortunes of the industry are uncertain. Following an improvement in wool prices over most of 2000-01, predominantly as a result of large price rises for the finer micron wools, confidence in the industry is returning. Wool producers are responding to these market signals by breeding finer micron wools than ever before. Recent reductions in the supply of wool, in particular the depletion of the wool stockpile, are causing a turnaround in the price of wool to profitable levels. In the 12 months to June 2002, the relative price of broad micron wools has increased dramatically, and is now in some cases equal to that paid for fine wool. With these price fluctuations come producer frustration, as many wool growers invested heavily in producing finer wool, only to see the relative price of fine wool drop. The increase in the value of the Australian dollar since February 2002 reduced wool prices over subsequent months, a trend which is expected to last some time.
Latest predictions available from ABARE suggest that wool prices will trend downward over 2002-03, due mainly to weakening world markets and a strong Australian dollar. It is expected that China will play a significant role in the profitability of the wool industry in the medium-term future. However there are many in the wool industry who believe that the low supply of wool available will counteract these influences and may in fact cause an upturn in wool prices.
ABARE (Australian Bureau of Agricultural and Resource Economics), Australian Commodity Statistics, Australian Bureau of Agricultural and Resource Economics, Canberra - various issues.
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Wright A 2000, 'Agriculture: Outlook for 2000-01', Australian Commodities: Forecasts and Issues, vol. 7, no. 3, September quarter 2000, ABARE, Canberra, pp. 432-459.
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