CHAPTER 3
Provisions of the Bill - Freezing of the Stockpile
The Bill
3.1 The Government introduced the Wool International Amendment Bill 1998 into the House of
Representatives on 11 November 1998.
3.2 The major purposes of the Bill have been summarised as:
- prohibiting Wool International from entering into contracts for the sale of wool from the stockpile
between the commencement of the Bill and 30 June 1999; and
- requiring Wool International to assist in the privatisation of the organisation. [1]
3.3 During the Bill's second reading speech delivered on 18 November the Minister for Agriculture,
Fisheries and Forestry, Mr Mark Vaile, stated that the purpose of the Bill is to freeze sales from the
Wool International stockpile and;
… end the debate about the management of the stockpile, by starting a process of taking
responsibility for its management out of the hands of the Wool International Board …
and placing it under the control of a new private sector entity in which the Directors will
be responsible to the shareholders who own the stockpile. [2]
Views on the freeze of sales from the wool stockpile
3.4 The Bill's Explanatory Memorandum states that the Commonwealth Government's objective in
implementing the freeze is:
… to help address the slide in wool prices, improve the financial position of wool
growers and to encourage processors not to switch to competitive fibres. Suspending
stockpile sales will take pressure off the fresh wool market and allow growers to release
some of their wool stocks. This will allow improved income in the short term, and
encourage maintenance of production levels. [3]
3.5 The Explanatory Memorandum went on to set out the Commonwealth Government's view on the
freeze when it stated:
The Government has concluded that a complete suspension of sales of stockpile wool
until 30 June 1999 would reduce market pressure caused by stockpile sales. It would
also provide wool growers with the opportunity to improve their financial position by
allowing them to sell wool from their privately held stocks and the current season's wool
clip. [4]
3.6 Dr Bob Richardson played down the role of Wool International in the decline of wool prices when he
told the Committee:
The key issue facing the wool industry is that it has been experiencing continued structural
decline in demand. This has been going on for much of the 1990's. It is this, not the
stockpile, which is the major factor in the poor state of the wool industry in Australia. [5]
3.7 When the announcement was made in August 1998 that the Government was intending to freeze
sales from the stockpile reactions were mixed. [6]
Support for the freeze
3.8 The Government has argued that wool prices have faced “severe downward pressure” due to the
1998 Asian economic crisis which has been coupled with a fall in apparel demand in key markets for
Australian wool in Europe, Japan, China and Korea. As a result of these severe circumstances Australian
wool producers found themselves in a desperate economic situation.. [7]
3.9 Representations were made to the Commonwealth Government arguing that the sales of stockpile
wool was having a negative effect on the market with prices falling from a peak of 753 cents per kilogram
clean on in June 1997 to a low of 462 cents on 22 October 1998. [8]
3.10 It was claimed that the continued sale of stockpiled wool in the current climate “could only
detrimentally affect the fresh wool market”. [9]
3.11 The Bill's Explanatory Memorandum set out a number of consequences if the wool industry was
allowed to contract as a result of the fall in the price of wool. These effects included:
- an increase in the number of wool growers leaving the industry;
- a decline in the economic viability of rural towns and communities;
- a dramatic cut in wool production resulting in supply problems for the wool processing sector; and
- a shortage in the supply of wool, possibly leading to the substitution of other fibres for wool,
resulting in a permanent loss of markets for the Australian wool industry. [10]
3.12 As of November 1998 there were an estimated 992 000 bales in broker's stores and around 285
000 bales being held on farms. According to the Commonwealth Government:
Any suspension of disposals on stockpile sales could be expected to allow growers to
increase the flow of wool from these grower stocks, and from the current season's wool
clip. Thus any impact of suspension of stockpile sales on the availability of fresh wool is
likely to be positive, in that it provides opportunities for increased wool sales from
growers holding significant stocks of unsold wool. [11]
3.13 However, a contrary view was held by the Pastoral Group of the Victorian Farmers Federation
who told the Committee:
Even the supporters of the freeze acknowledge that Wool International's stockpile will
simply be replaced by wool from the growers' and brokers' stores and therefore there is
little expectation of improved wool prices as a result of the freeze. [12]
3.14 The Government anticipates that its action in freezing stockpile sales will lend some stability to wool
prices and improve grower confidence in the wool market. [13] The Government is also of the view that
should woolgrowers replace the stockpile with sales from private stocks the “resultant increase in grower
income will have positive flow-on effects in their local communities”. [14]
3.15 The Wool Section President of the WA Farmers Federation, Mr Tony Gooch, supported the action
of the Commonwealth Government when he stated that the freeze on the sale of wool from the stockpile
would benefit privatisation by allowing time to determine the best course of action to deal with the
stockpile. [15]
3.16 According to the Commonwealth Government; “Supporters of the freeze generally believe that by
allowing growers to sell more fresh wool and wool held in store, it will provide financial returns to
growers at a time when it is greatly needed.” [16]
3.17 Dr Stephen Beare, Deputy Director, Australian Bureau of Agriculture and Resource Economics
(ABARE) told advised the Committee in evidence:
We were asked by the department to comment on options for freezing the stocks. Our
advice to the department essentially was that it probably would not have a great impact
on prices or throughput, so there would not be tremendously beneficial impacts in terms
of the market prices for fresh wool, nor would there be potentially large adverse impacts
on throughput through the industry, mainly because of the availability of private stocks.
So it was essentially a transfer of revenue potentially from Wool International to private
stock sales. That was the advice that we gave to the department. [17]
Opposition to the freeze
3.18 The Department of the Parliamentary Library's Bills Digest dealing with the Wool International
Amendment Bill 1998 noted that the “… response by industry representatives and by commentators to
the Government's announcement to freeze wool stockpile sales have been, for the most part, negative.”
[18]
3.19 The Pastoral Group of the Victorian Farmers Federation told the inquiry that in Victoria there was a
strong and “clear majority opposed to the freeze”. The Pastoral Group also stated that a Rural Press
survey had found that 60 per cent of Victorian and Tasmania producers opposed the freeze. [19]
3.20 When the original decision was announced to freeze the stockpile the action was attacked by the
Wool Council of Australia as irrational. [20] The Premier of Victoria, Mr Jeff Kennett was also critical of
the decision stating that:
… we are on an orderly process to get rid of that wool pile stockpile [sic], in about 12
months, 18 months. So we have actually buckled to a policy position that I think is
fundamentally wrong. [21]
3.21 Mr Bob Quirk, a spokeperson with the Australian Council of Australian Wool Exporters, claimed
that:
The Feedback I've had from people, both here and overseas, is just further dismay and
virtual disbelief because none of us within the industry, on our side at least anyway, can
see that freezing stockpile sales is necessarily going to be of any sort orf long-term
assistance to the wool industry. [22]
3.22 When Mr Anderson reaffirmed the Government's decision announced on 15 October to go ahead
with the freeze criticism was once again expressed concerning the decision. Mr Rod Thirkell-Johnston,
President of the Wool Council of Australia, expressed the view:
… I think a lot of people see a very simplistic solution in the present difficult situation that
if you just reduce the supply by the legislated amount in the stockpile that this will
increase the price of wool. But from all the research that we have had done, that doesn't
stack up … [23]
3.23 Mr Quirk again attacked the planned freeze when he stated:
From a personal point of view I think what is particularly disappointing about today's
announcement is the decisions were taken without any consultation with anyone on the
customer side of the industry. [24]
3.24 The Wool Council argued:
If the government proceeds with this decision, it is not in the best interests of Australian
woolgrowers, as it does not recognise the fundamental demand issues confronting the
industry. [25]
3.25 Although opposed to the freeze, by the time the Wool Council appeared before the Committee on
27 November 1998 it had accepted that the freeze was going to come into place. According to Mr
Thirkell-Johnston, President of the Wool Council, “… we have gone beyond the position of no return as
far as the freeze is concerned.” [26]
3.26 The Western Wool Growers, Pastoralists and Graziers Association of Western Australia,
expressed a similar view to that of the Wool Council when it stated:
The principle of a freeze to us was an economically bad decision, but the realities of life
are such that the freeze is in place now. It has been twice. It is in place. So the decision
to make the freeze is now history. I believe, and our association believes, that it is time to
move forward and deal with the freeze in the best possible way. [27]
3.27 The NSW Farmers' Association stated in its submission to the inquiry:
From recent history, there is no evidence that reducing stockpile sales results in any
sustainable increase in wool prices. The Government cut the legislated selling schedule
from 180 000 – 190 000 bales per quarter in 1996, to a minimum of 90 000 bales per
quarter in 1997. Although some short term price recovery was experienced, this quickly
subsided with prices falling to their lower levels since 1993. [28]
3.28 Dr Richardson of Wool International told the Committee that “… our analysis suggested that there
were lower net returns to unit holders form a freeze than from other alternatives”. [29]
3.29 On 16 October 1998 the Mr John Cobb, President of the NSW Farmers' Federation Association
alleged that the Commonwealth Government's decision to reinstate the wool stockpile freeze
compounded 10 years of mismanagement and policy backflips by “conservative governments”.
According to Mr Cobb the decision to freeze the stockpile:
… destroyed the standing of Australia as a reliable supplier of apparel wool …. Selling
down the stockpile was the best way to restore market confidence and concentrate on
the core problems facing the industry. [30]
3.30 In evidence to the Committee on 27 November 1998 Mr David Wolfenden, Chairman, Wool
Industry Committee, New South Wales Farmers' Association stated:
We believe that the decision on the freeze brought an unnecessary hiatus to the wool
industry. It is interesting to note that many participants in decision making in the wool
industry are stating that we are seeking less government involvement in the wool industry.
This decision seems to be one last fling of huge government involvement and, in fact, the
total freeze would be a large government involvement before we get rid of government
involvement. We certainly question why this decision to freeze was necessary before the
process of privatisation. [31]
3.31 The Pastoral Group of the Victorian Farmers Federation considered that:
The decision to freeze the Wool International stockpile sales has unfortunately been
driven more by individual political agendas,both within industry and at our federal
government level,rather than commercial logic. Those supporters of the freeze have paid
no regard to economic analysis of this option versus other available options; the impact of
this decision on wool growers, who have used financial lending facilities with their equity
in Wool International; the impact of this decision on the private sector, who are again to
be a victim of federal government intervention in the wool industry; and the impact of this
decision on wool grower equity in Wool International. [32]
3.32 The Wool Council of Australia told the Committee that many international customers for Australian
wool believed that the freeze was a “breach of faith”. [33]
3.33 Concerns were expressed that the freezing of sales from the wool stockpile would effect loans
taken out by primary producers using their entitlements in the stockpile as security for these loans. The
Wool International Amendment Act 1997, No. 108, 1997 provided for wool growers, who had
contributed money towards managing and disposing of the stockpile between 1 July 1993 and 1 July
1996, to be given the right to share in the surplus funds of Wool International. The Act allowed
producers to trade these future entitlements or pledges them as security for loans taken out with financial
institutions. [34] Equity entitlements are considered to be a significant asset for many woolgrowers. [35]
3.34 The Pastoral Group of the Victorian Farmers Federation informed the Committee that:
Elders Rural Finance loan securitisation facility, Wesfarmers Dalgety loan facility and
Macquarie Bank Wool International equity trading facility have been utilised by a large
number of producers, with an estimated $40 million so far lent by the two financing
facilities. These producers accessed these services on the understanding that there was a
clear, legislated, disposal policy for Wool International, leading to a legislated final date
for stockpile disposal at the end of 2000. [36]
3.35 The Pastoral Group went on to state:
Wesfarmers have also corresponded with those producers who accessed their financing
facility, seeking either full repayment by 30 June 1999 or the conversion of the loan to
another Wesfarmers product with a request to provide extra security in the form of a
stock or wool lien. This decision was made due to the uncertainty associated with the
future value of Wool International units due to the freeze of Wool International activities
by government intervention. Both scenarios place those producers who utilised these
facilities in a totally untenable situation and could leave exposed producers with little
option other than to launch a class action against the federal government. [37]
3.36 It was submitted to the inquiry that with every bale sold from the stockpile the debt of the stockpile
was reduced thereby increasing the growers' equity. However, with the sales frozen “… costs such as
storage and interest have begun to eat into the equity that growers would have received at the wind-up of
the stockpile, thereby reducing the value of the equity.” [38]
3.37 The Pastoral Group of the Victorian Farmers Federation Pastoral Group claimed that:
The Federal Cabinet decision to freeze the stockpile will result in Wool International
equity being reduced by over $10 million per quarter due to additional costs in debt
servicing and operation costs. [39]
3.38 During the Bill's second reading debate in the House of Representatives it was claimed that many
buyers of the wool from the stockpile had made “made significant investments in plant and equipment to
the handle the wool”. It was argued that the freeze of wool stockpile sales could result in these buyers
turning to synthetic fibres and cotton to use in their industrial processes. [40]
3.39 The Sheep and Wool Council of Queensland argued that while the stockpile freeze was in place
costs such as storage, interest and insurance would continue to accrue on the stockpile and that these
costs would escalate draining resources from WI. The Council also pointed out that hidden costs of the
freeze included the loss of experienced staff from the organisation and the payment of redundancies. [41]
The Council is of the view that the Commonwealth Government should take responsibility for the costs
associationed with the freeze. [42]
3.40 The Wool Council of Australia claimed that the freeze on the wool stockpile would seriously
handicap all privatisation options and that to maximise the value of WI when it is privatised it had to be a
going concern. [43]
3.1 3.41 Dr Bob Richardson, Chief Executive Officer with Wool International, told the Committee that a
rough estimate of the additional cost to WI of the freeze would be $3 million to $4 million spent on
interest and storage. However, cost savings would total about $2 million. This led Dr Richardson to claim
that the immediate cost effects on WI would be “minimal”. [44]
Footnotes
[1] Department of the Parliamentary Library, Bills Digest No. 18 of 1997-98, p. 1.
[2] House of Representatives Hansard, 11 November 1998, p. 57.
[3] Wool International Amendment Bill 1998, Explanatory Memorandum, p. 4.
[4] Wool International Amendment Bill 1998, Explanatory Memorandum, p. 7.
[5] Evidence, Wool International, p. 2.
[6] Wool International Amendment Bill 1998, Explanatory Memorandum, p. 4; see also Submission,
NSW Farmers' Association, p. 3; for a somewhat different view on the importance of the Asian crisis on
the price of wool see Evidence, Wool International, p. 7..
[7] Wool International Amendment Bill 1998, Explanatory Memorandum, p. 2.
[8] Wool International Annual Report 1997-98, Wool International, Melbourne, October 1998, p,. 7
and Wool International Amendment Bill 1998, Explanatory Memorandum, p. 3; see also Department
of the Parliamentary Library, Bills Digest No. 18 of 1997-98, p. 2.
[9] Wool International Amendment Bill 1998, Explanatory Memorandum, p. 3.
[10] Wool International Amendment Bill 1998, Explanatory Memorandum, p. 4.
[11] Wool International Amendment Bill 1998, Explanatory Memorandum, p. 5; see also Evidence,
Wool International, p. 3..
[12] Evidence, Victorian Farmers Federation Pastoral Group, p. 23.
[13] Wool International Amendment Bill 1998, Explanatory Memorandum, p. 6.
[14] Wool International Amendment Bill 1998, Explanatory Memorandum, p. 6.
[15] AAP news item 15 October 1998 titled: Government Wool Proposals Face Flack from
Industry.
[16] Wool International Amendment Bill 1998, Explanatory Memorandum, p. 6; see also House of
Representatives Hansard, 12 November 1998, p. 195.
[17] EvEvidence, ABARE, p. 45.
[18] Department of the Parliamentary Library, Bills Digest No. 18 of 1997-98, p. 3: see p. 3 for a
selected list of organisations and individuals opposed to the freeze; see also House of Representatives
Hansard, 12 November 1998, pp.181, 182.
[19] Submission, Victorian Farmers Federation Pastoral Group, p. 8. This page also sets out other
groups opposed to the freeze. See also Evidence, Victorian Farmers Federation Pastoral Group, p. 29.
[20] Transcript of interview on TV program 7.30 Report, 5 August 1998, p. 1; see also Submission,
Wool Council of Australia, p. 2. .
[21] Transcript of interview on TV program 7.30 Report, 5 August 1998, p. 2.
[22] Transcript of interview on TV program 7.30 Report, 5 August 1998, pp. 2-3.
[23] Transcript of interview on radio program AM, 5 August 1998, p. 1. The Wool Council of Australia
supplied the Committee with a list of wool grower bodies setting out their positions on the stockpile
freeze, see Submission (supplementary), Wool Council of Australia.
[24] AAP news item 15 October 1998 titled: Government Wool Proposals Face Flack from
Industry.
[25] AAP news item 15 October 1998 titled: Australian Wool Stockpile to be Privatised Next Year.
[26] Evidence, Wool Council of Australia, p. 9.
[27] Evidence, Western Wool Growers, Pastoralists and Graziers Association of Western Australia, p.
38.
[28] Submission, NSW Farmers' Association, p. 3.
[29] Evidence, Wool International, p. 5.
[30] AAP news item 15 October 1998 titled: Australia's Image as Wool Supplier Hit by Stockpile
Freeze..
[31] Evidence, NSW Farmers' Association, p. 31
[32] Evidence, Victorian Farmers Federation Pastoral Group, pp. 24-25
[33] Evidence, Wool Council of Australia, p. 14.
[34] Wool International Amendment Act 1997: No. 108, 1997, Section 3, sub-section (3) (a)(b). For
information on a loan securitisation facility obtained by WI see Wool International Annual Report
1997-98, Wool International, Melbourne, October 1998, pp. 7-8.
[35] See Disposal of the Australian Wool Stockpile, ABARE Current Issues paper No. 98, February
1998, p. 1.
[36] Evidence, Pastoral Group, Victorian Farmers Federation, p. 24.
[37] Evidence, Pastoral Group, Victorian Farmers Federation, p. 24.
[38] Submission, United Graziers Association of Queensland, Sheep and Wool Council of Queensland,
p. 2.
[39] Submission, Victorian Farmers Federation Pastoral Group, p. 1.
[40] House of Representatives Hansard, 12 November 1998, p. 180; see also Submission, Wool
Council of Australia, p. 3
[41] Submission, United Graziers Association of Queensland, Sheep and Wool Council of Queensland,
p. 1.
[42] Submission, United Graziers Association of Queensland, Sheep and Wool Council of Queensland,
p. 2.
[43] Submission, Wool Council of Australia, p. 3.
[44] Evidence, Wool International, p. 1.