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Beyond the Bale : March 2016
MARKET INTELLIGENCE 51 The most significant examination of the wool selling system since the arrival of the digital age is now complete. Commissioned by the AWI Board, the Wool Selling Systems Review (WSSR) examined in detail the opportunities for innovation in the exchange of wool from the farm gate until it passes the ship's rail for export. AWI CEO Stuart McCullough said the review involved some of the greatest competition and business minds in Australia. “This very significant review was conducted at arms-length to AWI. It involved almost 100 submissions and many more issues raised from a wide variety of viewpoints and much discussion and debate. This review explores some great opportunities to reduce the cost of selling wool for growers, reduce the barriers for those wanting to buy wool and to help bring the wool industry into the digital age.” The WSSR Panel included Fox & Lillie Managing Director James Lillie; Graeme Samuel AC, Monash Business School, Monash University; Bernard Wonder PSM, consultant and director; and William Wilson, director of Australian Investor Relation Services. John Roberts, director of Eubindal Pty Ltd was the executive officer and secretariat for the panel. REPORT AT A GLANCE The 68-page final report of the WSSR Panel includes a number of significant findings and recommendations. The key points of the report, as outlined by the Panel are: • Australia’s wool selling system is dominated by open cry auction which provides prompt and secure payment as well as managing sales of a highly diverse product. However, unlike selling systems serving other rural industries, the wool selling system has proved resistant to change, largely as a result of high transaction costs of moving to alternative systems as well as complexity and limited transparency of the current system. • The Panel’s focus on the selling system has been from the time wool leaves the farm until it passes the ship’s rail for export. The estimated total cost of the selling system in 2014/15 based on this definition was around $300 million, although the real cost may be higher to the extent that the current system inhibits take-up of alternative selling options. • The Panel has identified a lack of competitive neutrality surrounding the operations of the Australian Wool Testing Authority (AWTA). The proposed remedy is for AWTA to make a tax equivalent payment to be used for R&D purposes. In the long term, the Panel expects this action to increase competition in the testing environment, including on-farm testing of wool. • The appraisal of wool at auction looks to be ‘gold plated’, involving objective testing, sample display and multiple appraisal. The Panel sees scope for a differentiated approach not necessarily requiring sample display of all wool and making greater use, where appropriate, of sale by description. • Brokers’ charges (which account for more than 50% of total selling system costs) and related service offerings are not always transparent to growers. The Panel has developed an initiative for a wool selling portal (see below) which could go some way towards enhancing transparency and thereby assisting the efficiency of decision making. • In regard to commission buying, the Panel sees potential problems with a buyer using the services of a potential competitor and the sharing of price and purchase information such behaviour implies. However, the issues raise complex legal and competition questions and the Panel recommends affected parties seek appropriate advice. AWEX may also need to review its arrangements designed to facilitate and promote competition in the wool market. • A smaller wool clip has fuelled debate regarding further centralisation of selling centres from both a cost reduction and increased returns perspectives. The Panel recognises this is a priority issue for industry attention but has concluded that any action in this regard is largely a commercial matter. • The large number of small lots sold and their related system-wide costs is of concern to the Panel. It recommends increased lot sizes which should improve the efficiency of the selling system and reduce costs accordingly. • The Panel has concluded that most of the issues it has identified and analysed can be addressed in part by the development of a Wool Exchange Portal (WEP). The WEP would be an online tool to enable growers and other market participants to compare available options and to choose selling and buying strategies best suited to individual circumstances. The Panel expects a WEP would reduce selling costs and enhance competition in the selling system. • The WEP could help achieve virtual centralisation; it could provide opportunities to reduce the large number of very small lots; it could overcome the need for physical attendance at auctions and thereby reduce the need for commission buying; and it could enhance the level of transparency while promoting competition. • The Panel recommends the WEP be taken forward by a Steering Group. Further details of the work to be done in this regard as well as options concerning ownership and operation of the WEP are provided in the report. The Wool Selling Systems Report will now be discussed as part of ongoing consultation with AWI shareholders. MORE INFORMATION The WSSR Panel’s report is available on the AWI website at www.wool.com/wssr The independent panel commissioned by AWI to examine the wool selling system has issued its final report which includes a number of significant findings and recommendations. WOOL SELLING SYSTEMS REVIEW
In the Shops - March 2016