AWI’s insolvency WoolPoll ‘scare tactic’ fails detailed analysis

Terry Sim, October 26, 2018

Industry analyst Robert Ingram

AUSTRALIAN Wool Innovation stands accused of underestimating future wool prices, changing its forward wool production estimates and engaging in scare tactics to persuade growers to vote for a 2 percent levy in the 2018 WoolPoll ballot.

Industry analyst and WoolPoll panel member Robert Ingram is disputing as a “scare tactic” AWI chairman Wal Merriman’s claim the company would be insolvent in the next WoolPoll period — 2019-22 — if growers vote for a 1.5pc levy.

“There are lobby groups out there now agitating for a 1.5 per cent levy,” Mr Merriman told Senate Estimates this week.

“Stuart’s (AWI CEO Stuart McCullough) figures on that show that we’re technically insolvent in the first year of the WoolPoll event.”

However,  Mr Ingram,  an Australian Wool Grower Association director, has calculated that with a benchmark AWEX Eastern Market Indicator above 1850 cents a kg clean AWI could maintain annual reserves above $75 million and have annual expenditure of $100 million from 2019-22 despite a 25 percent cut in the wool tax.

And with an EMI of 1750 cents and annual expenditure of $100m during 2019-22, Mr Ingram calculates AWI’s reserves would still be at about $50m by 2022. An 1850-cent EMI leaves $63m in reserves and with an EMI of 1818c/kg – the average of the current and past selling season — reserves would be $60m by 2022.

In its 2018-19 annual report released this week, the grower levy-funded marketing, research and development company outlines revenue, expenditure and reserves forecasts based on an estimated EMI of 1650c/kg clean.

On page 5 in the report, assuming a continued wool levy of 2pc, wool production of 322 million kilograms and an EMI of 1650c/kg, AWI has estimated its 2018-19 revenue would be $97.84 million, and with budget expenditure at $111.24 million, this leaves reserves of $108.5 million.

However, including the EMI’s 93-cent fall to 1874 cents this week, the wool price benchmark from July-October this season has ranged from 1874-2116c/kg and averaged 2028 cents (AWEX). This meant that for the EMI to average 1650c/kg for the entire 2018-19 financial year as forecast in AWI’s annual report, the indicator’s average from November to June 2019 would have to crash by more than 500 cents to about 1510c/kg. In the 2017-18 season, the EMI ranged from 1519-2073c/kg and averaged 1734c/kg.

Barring an escalation of the US-China trade, ABARES last month forecast the AWEX Eastern Market Indicator to rise 15pc in 2018-19 to 1990c/kg clean, underpinned by an assumed fall in the Australian dollar to US74 cents. The $A-US exchange rate is currently around US70 cents. ABARES also assumed global demand for fine and superfine wool would be sustained and poor seasonal conditions would reduce shorn wool production.

“Is anyone predicting an EMI crash of 400-500 cents?” Mr Ingram asked.

He said the latest EMI forecast figures in the AWI annual report were confusing for wool growers trying to make an informed levy choice in the WoolPoll ballot.

“When you do the sums from the figures in the AWI annual report out this week, AWI is by default predicting a massive crash in the EMI to an average of 1510 cents for the rest of this financial year.

“Industry wants to know why, what message are they trying to send?” he asked.

“To achieve this (2018-19 EMI) average means that at some point in the next eight months the EMI would need to fall below 1500 cents for considerable periods of time to achieve a 1650 cent average for the year,” he said.

“Why is AWI by default predicting such a massive crash in wool prices?” Mr Ingram has asked.

“I think it is incompetence.”

AWI forward planning confusing — Ingram

Mr Ingram said the AWI executive has now used three EMI predictions during the 2018 WoolPoll ballot, in presentations to growers, in the media and in its annual report, to justify the current 2pc levy being continued.

These include:

–  an EMI of 1700c/kg for its budget assumptions for the next levy period of 2019-22 as outlined in the voter information memorandum sent to growers for the 2018 WoolPoll ballot which closes on November 2.

– an EMI of 1850c/kg in a revised budget for 2019-22 presented to peak grower body WoolProducers Australia and AWI’s Industry Consultative Committee, and;

– most recently an EMI of 1650c/kg for 2018-19 in the 2017-18 annual report.

AWI has also used varying estimates of future wool supply, including 352 million kilograms with a 2pc increase per annum for 2019/20 in the WoolPoll VIM. More recently, as wool testing figures highlighted the drop in auction volumes, and in an effort to encourage WoolProducers to support a 2pc WoolPoll outcome, AWI used an annual wool production figure of 293 million kilograms for 2019-22.

However, despite the volume tested by the AWTA falling 19.2pc in September, prompting the Australian Cool Production Forecasting Committee to bring its next meeting forward four weeks to November 14, and growers having only until November 2 to vote in WoolPoll, AWI has refused to circulate comprehensive revised 2019-22 budget figures to wool growers with a detailed expenditure and project plan.

“The planning in our company by the AWI executive is at least confusing, if not chaotic and we pay the chief executive officer $340,000 a year for this chaos,” Mr Ingram said.

“We who pay our hard earned dollars on a daily basis to AWI deserve far better than this.

“What an incredible example of professional incompetence running our $121 million company,” he said.

“What we want to know is why in a period of five months AWI has used three different EMI figures going forward?”

“Why have they used 1700 cents in the VIM package and 1650 cents in the annual report without a plausible explanation?”

AWGA, like the peak grower body WoolProducers Australia, has a stated preference for a 1.5pc result in the 2018 WoolPoll. However, Mr Ingram said he did the in-depth analysis of AWI’s likely financial position during 2019-22 with levies of 1.5pc and 2pc to give growers realistic figures on which to base their WoolPoll decision.

Mr Ingram said his main analysis, despite assuming an EMI range of 1850-1978c/kg from 2019-22 and conservative annual wool production estimates of 290-327mkgs, indicated the company would not slide into insolvency with a 1.5pc levy during 2019-22.

“The modelling indicates that with conservative estimates of income and good financial management of expenditure, and taking account of the current drought and a 1.5pc levy from 1 July 2019, leaves AWI where is reserves of around $70 million at the end of the 2021/22 financial year.

“This leaves ample funds to cover the mandatory requirements if the company was to be wound up and a surplus of around $25 million,” he said.

“The modelling shows with prudent financial management and the drought breaking in autumn next year AWI in 2022 will still have reserves of $100 million with a 1.5pc levy.”

Mr Ingram is regularly required to model outcomes for sectors, industries, regions or programs/projects in his work. He has 35 years’ experience designing, planning, managing, and implementing agricultural and agribusiness development programs in Third World countries and Australia.

“The budgets have been produced in the same format as that used by AWI in its annual reports to allow direct comparison to what has been previously reported by AWI,” he said.

WoolProducers also disputes insolvency claim

WoolProducers vice president Ed Storey said AWI had used different EMIs in different scenarios.

“But the purpose of those EMIs is legitimate in my opinion.

“To budget for four years out using the current price, would be folly; you would lock yourself into levels of expenditure that should the market fall even a little, you would be very exposed,” he said.

“To use 1700 cents for the next four years is appropriate.”

“But even off their own figures that doesn’t indicate they need 2pc,” Mr Storey said.

“To set the company’s expenditure off a too-high revenue base will lead to problems.”

He said WPA disputed that if the levy dropped 25pc AWI would have to drop their expenditure by 25pc.

“No, they don’t, that’s rubbish.

“WoolProducers stands by its comments and rejects the allegation of insolvency at 1.5pc, that’s something we strongly disagree with,” Mr Storey said.

“If the company gets 1.5pc and continues to spend as if the levy was at 2pc levy, then yes, they will get into trouble, they will be spending too much.

“We stand by our position that a levy of 1.5pc can underpin an expenditure of about $100 million a year over the next WoolPoll period, which is the highest budgeted expenditure the company has ever had,” he said.

No insolvency under 1.5pc, but cuts — McCullough

AWI chief McCullough has told Sheep Central the company’s activities had to be adjusted according to revenue coming in.

“It’s not an easy business to wind up and wind back, it’s not easy to turn the expenditure up and it’s not easy to turn it back either.

“But the bottomline is, if it goes to a 1.5 per cent vote and we are at 293 million kilograms (wool production) and an 1850 (cent) indicator, there is a lot of money out of the business – that’s just maths.”

However, in contrast to insolvency claims made by Mr Merriman in this week’s Senate Estimates hearing,  Mr McCullough told Sheep Central a 1.5pc levy would not mean that the company would have to wind down by 2022.

“Oh no, what you would do is start trimming it.

“What we are most concerned about is our trend line of technical insolvency, because zero is always an option in a WoolPoll, effectively you are providing wool growers the opportunity to close the company in any three year cycle,” Mr McCullough said.

“Because that is always there, it must be there, then the company keeps reserves of about $47 million.

“So what we look at is the line of technical insolvency and above $47 million it (the company) is solvent and below $47 million you are technically insolvent,” he said.

“It’s a moving target as you know with wool prices.

“Supply used to be predictable, supply is now unpredictable and wool prices have always been unpredictable.”

Mr McCullough is concerned the company would be on a trend line to insolvency if a 1.5pc levy was instituted.

“When you model it at 1.5pc, 293 million kilograms and an EMI going down, yeah, you have to change something really dramatically really quickly – you certainly can’t keep expenditure anywhere near where it is.

“We are on the public record saying that you take 25pc of revenue away from the company and shearer and shedhand training, robotics, flies, lice, worms, dogs, marketing, human resources – everything gets cut,” he said.

“If you take 25pc in terms of levy away and then also compound that with reduced volume and reduced value, then you’ve just got to shrink and shrink real quick.”

McCullough avoids ‘scare tactic’ suggestion

On the question of tougher seasons meaning the clip would be finer and therefore of a high value, Mr McCullough said the impact of this would be marginal.

“You can’t pin your hopes on hunger fineness.”

On whether AWI director David Webster’s recent claim that rising wool usage and sustained demand “would almost certainly stall” if growers voted for a 1.5pc levy was a scare tactic, Mr McCullough said Italian Paolo Zegna would be distributing a letter stating that the damage being done through agri-political activity around “brand wool” on overseas markets can’t be underestimated.

“I think what has to happen here is that wool growers have to think very carefully about who they listen to here and look at the real position of where we are at.”

“Some of the things that are really concerning me are our alliance with the US and the US trade wars with China which are just worsening by the day and our government’s relationship.

“That’s one of my biggest concerns, not volume or value.”

AWI director Don Macdonald said AWI had “run the numbers” on what the EMI would have maintain at to support a 15pc drop in wool production from the estimated 2017-18 level “if it becomes a reality.”

“And basically to stay out of the mandatory reserves, the indicator has got to stay at where it is now, about 2000 cents.

“To maintain the discretionary reserves, which the board took the decision some months back to hold an extra $20 million in reserves for ‘blue sky’ projects like robotic shearing, we’ve got to average over 2300 cents….

He said AWI would have to make more cuts if a 1.5pc levy got up, unless the EMI stayed over 2300 cents.

Mr Macdonald said the combined impact of a reduction to a 1.5pc levy rate and the anticipated 15pc production decrease, will result in a 36pc drop in your company’s income.

“Maintaining the current levy is critical to ensure AWI can continue to invest in current and new projects for the next three years.

“Due to the most recent supply figures published by AWTA, AWI anticipates a decrease of 15pc in production in 2018-19 and it will take time for the industry to rebuild,” he said.

“With this anticipated reduction in supply, if the levy is lower than 2pc we would not be balancing our financial responsibility with our capacity to deliver benefits for growers.

“To ensure responsible financial management, particularly in meeting contractual and operational commitments, AWI has a policy to ensure it maintains adequate cash reserves to meet the costs of winding up the company should a cessation in levy occur at any time.”

Click here to see Mr Ingram’s overall projections in Excel.

Click here to AWI reserves and revenue projections at 1.5pc and 2pc with an 1850-cent EMI from 2019-22.

Click here to see AWI reserves and revenue projections at 1.5pc and 2pc with an 1850-1978 cent EMI from 2019-22.

Click here to see AWI reserves and revenue projections at 1.5pc and 2pc with an EMI of 1750 cents from 2019-22.

Click here to see AWI reserves and revenue projections at 1.5pc and 2pc with an EMI of 1990 cents (ABARES).

Click here to see Robert Ingram’s AWI levy analysis assumptions.


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  1. Peter Small, October 29, 2018

    Jim Gordon raises very salient points, all correct. The last point though — re the importance of count, not micron — means turning back the clock to pre-objective measurement. But wool growers should ask: Has the industry benefited from sale by objective measurement? For those who are not old enough, objective measurement (O/B) was a Wool House-driven initiative, driven by the wool bureaucrats fascination with selling wool sight unseen. This is still an unachieved objective of this current crew, who bleed us of 2 percent of our gross income every year to pursue their irrelevant machinations.

  2. Jim Gordon, October 28, 2018

    Levy payers, please ask yourselves, if AWI disappeared tomorrow, how much difference would it make to your business? There is a $100 million price tag in having them involved. AWI are very focused on themselves, are you getting any benefits?
    The world textile market is continually developing new ways to produce lighter and softer apparel, for the discerning consumer, it is time the Australian wool industry thinks and plans the same.
    If the wool market halves, or even goes lower than half, the levy payers need to have a very close look at what research projects are really beneficial.
    The big one for me is, how wool is sold. It should be sold on how many metres of yarn is produced per kilogram ie. counts, not on micron. One can have lower micron wools that are scratchy and higher micron wools that are soft.
    The main reason a micron measurement is needed, is so the spinner knows how thick the yarn will be, and the weaver will then know how thick the fabric will be.
    At the moment, micron is being used as a quality marker and it shouldn’t be. Things like softness, elasticity, scratchiness, metres of yarn per kg, etc should be used to sell wool.
    Instead of all this squabbling about insolvency, have a close look at what the levy payer wants. Try to listen for once in your lives.

  3. Michelle Humphries, October 27, 2018

    AWI does well to err on the side of caution. Mr Ingram’s figures show a projected $63.489m reserve in 2021-22 at 1.5 percent levy. Given that AWI needs $47m reserve plus another $10m for Woolmark, say ~$60m total reserves, that is getting too close for comfort. And what of the following three years of spending down reserves?

  4. Chick olsson, October 26, 2018

    It’s very clear that AWI does not have any idea about the wool market and has misled wool growers with doomsday predictions. A Senate enquiry must be on the cards to rein it this maverick wool tax organisation.

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