Australia’s wool industry faces major challenges as its trajectory takes an opposite path to wheat and grains, according to WAFarmers CEO Trevor Whittington
Have you ever wondered why Australia’s wheat production keeps growing while our wool production keeps falling?
For those not deep into economic history, this is a brief history lesson of wool prices. Australian wool is no stranger to the ups and downs of the commodity cycle, having gone through at least six major cycles over the past 140 years.
There was the boom of the 1880s which led to an oversupply and price crash during the 1890s Centennial Drought, repeated again with the price boom of the Roaring Twenties.
This was followed by a collapse in prices during the depression and the post war upswing culminating in the Korean War price spike of a ‘pound for a pound’ ($60/kg greasy today) which again collapsed.
Then there was a mini boom in the mid 1960s, followed by yet another collapse which led to the creation of the reserve price scheme, introduced in 1970 to help protect farmers against what was termed ‘potholes’ in price levels, with a government-supported stockpile buying wool at a set reserve price if there was no better market price available.
The development of the single desk for wheat between 1939 and 1999 was driven by similar political pressures.
In 1970, the price of wool was 113.4c/kg, some 60 per cent of the price received four years earlier, and by far the lowest price since the end of the Second World War.
The reserve price improved confidence and was followed by the boom in 1973 linked to an oil price rise pushing up the cost of synthetics, but that boom ended with the inflation that followed.
The scheme, which was cheered on by New Zealand and Argentinian farmers who did not have to pick up the interest tab, collapsed when inevitably the government pulled the plug on the growing stockpile.
This exploded between 1989 and 1991 after the reserve price was lifted to 870c/kg in 1987, leaving a long hangover of 4.7 million bales and a storage bill of $3 million a day for the industry to deal with over the next decade.
The most recent price spike in 2018 was driven by the growing Chinese economy, which has now well and truly fallen in on itself.
On average, every price boom is followed by a 60 per cent market price collapse – something that occasionally happens in the grain market as the cycle is much faster, but nowhere as near as devastating as in the sheep industry which struggles with years-long downturns.
In the case of wool, the market responds to higher prices by walking away from what is a luxury product and seeks out cheaper alternatives.
The same cycle can be found in other Australian luxury products such as pearls, wine or even Sandalwood; even most minerals go through a regular cycle of ups and downs.
Grain is an exception, as there are not many substitutes for wheat, barley, and rice unless you want to starve or eat less grain-fed meat.
The only product to defy this boom-bust cycle I can think of is diamonds, at least until the last three decades.
The market had been tightly controlled by De Beers, holding up to 90 per cent of all sales until Argyle Diamond mine came online.
Like the wool reserve price scheme, De Beers attempted to defy economic reality and started buying up diamonds to prop up the price, but this collapsed in 1996, signalling the beginning of the end of more than 100 years of controlled marketing.
The final nail in the coffin was a US class action in 2012 which destroyed the last vestages of the monopoly.
This led to diamonds, like wool, being seen as just another product, which was good for the consumer but not so good for the producer.
Still, wool growers have to the ultimate optimists as those families that remained in the game over the decades have built farms literally off the sheep’s back, but I wonder if it will continue.
This year marks 32 years since deregulation and production has collapsed fivefold in volume, from over 250,000 tonnes then to not much more than 50,000 tonnes today.
Sheep numbers have also fallen, from 180 million to around 80 million today. In turn, wheat has doubled the number of hectares sown from 8 million to over 16 million, with all other grains doubling their acreage.
Adding to the pressure on wool has been the demand for sheep meat and the steady winddown of the live export market which gave a home to older sheep held back for their wool.
The decline in sheep is only likely to increase because of the recent collapse in sheep prices in WA, along with the threat of the axe hanging over the live export market – not to mention the cost and availability of labour in WA due to mining booms and the relentless campaigns by animal activists to end any form of livestock production.
For an industry that looked like it had turned the corner in 2018 and was here to stay, built on the back of the booming Chinese market and the supposed growing demand for all things clean and green, it has been a huge step backward to end up where we are today.
My guess is wool will continue to be replaced by wheat as we march towards 2030 as the cost pressures of a labour-intensive industry which is under attack by activists, and the pressure on livestock carbon emissions, will see yet more wool growers turn to grain.