Merino NZ: Bridging the Value Gap for NZ's Premium WoolInternational Trade
Merino New Zealand
Chairman John Perrian, CEO John Brakenbridge, Ladies and Gentlemen. Merino New Zealand has brought some life back into the New Zealand wool industry. To be fair, the heartbeat is still faint, but we can now be confident the patient can recover. Merino New Zealand is committed to bridging the gap between what the wool industry is today, and what it could be in the future. That this is the best attended wool conference in New Zealand for a decade shows a better level of long-term confidence and commitment than we've seen for some time. And, from what I know of your organisation, I'm sure it has been a great success.
If you are hoping for me to close the conference by updating you on the current political situation, I'm sorry, but you are going to be disappointed. Given that I've been on an aircraft for the last hour or so, and the way the political drama is unfolding by the hour, I'm not sure I'd be up-to-date anyhow. What I can assure you, though, is this: Our National-led Government will provide the good and stable government that New Zealanders deserve. We'll work with anyone else who shares that objective.
Earlier this year, your European-based marketers organised a publicity event in Milan. All the top fashion people in the city were invited, including the editor of Vogue, who had previously published a special on Merino New Zealand. They weren't necessarily the sort of people who'd fit in on a New Zealand farm, but I can assure you that all of the New Zealanders at the function recognised that they are the future of the industry. We did our best to charm them and flatter them. My role was relatively simple. I had my photograph taken, as a body on which to publicise the latest wool technology and one of the world's most prestigious fashion garments, a pure Merino New Zealand wool suit. I was happy to use my position to support a good idea for a promotion in Europe's fashion capital. This is that suit.
Your CEO tells me that this suit would retail in Milan for around $2,000. But how much do you think the wool in this suit is worth. A third of that $2,000? A quarter? A fifth? In fact, your CEO says the value of the wool in this suit at auction would be only $80 to the New Zealand farmer - that's $1,920 less than the value of this suit in Milan. The issue is this. You could double the value of the wool in this garment, and it would barely affect the price of this suit. For a consumer in that market, an extra $100 dollars would make absolutely no difference. And there are millions of people around the world prepared to pay that amount for suits of this quality. Yet the difference for the New Zealand farmer would be enormous. I repeat the numbers: The suit is worth $2,000 in Milan. The New Zealand farmer would have received eighty bucks for the wool at auction.
It has been said so often it barely needs repeating: We cannot continue if we see ourselves in a wool business. Our wool industry has to see itself as part of the fashion and interior design industry. We can never do that if we continue to focus on the excitement of the auction, with its possibility of one day delivering us a higher price than our neighbour. Lotto may well be a better long-term investment. As I have said many times before, and I will continue to say in the future, if I were asked to design a system guaranteed to deliver the lowest possible price to farmers long term, I'd design the auction system. The value of your wool is potentially so much greater than what you could ever get at auction. But the auction system ensures that we let go of the product almost immediately - without any chance of capturing any but a tiny share of its potential value in the market.
Your recognition of the futility of that approach is why I am a big supporter of your strategies. I was pleased to support your start up, and help you with your promotions in both Europe and Japan. You have innovative and enthusiastic people in the marketplace. The ones I've worked with I respect enormously. They're putting their whole lives into promoting the brand and building the necessary relationships with the fashion industry and other customers to develop direct supply contracts. From what I have seen, they are committed for the long-haul to improving returns to the New Zealand farmer, and to New Zealand.
It is critically important that farmers also remain committed for the long-haul. None of you should expect that the strategy is going to deliver a huge boost to incomes immediately. Forecasts for commodity prices are not good, and at this early stage, you are still exposed to those swings and round-abouts. In the short-term, farmers will have to accept that the strategy will help more to cushion the blow of falling commodity prices, rather than deliver higher returns to all.
But, even at this early stage, the strategy is beginning to make a difference. You are achieving recognition for Merino New Zealand as an exclusive, natural product, by the fashion industry around the world. That is the critically important first step, but it takes time, money and patience. Already, last year, the strategy has meant that the New Zealand merino industry was the only wool sector to outperform your competitors. All our other wools lost market share and premiums. You either equalled or outperformed Australia in all recorded micron ranges. It's little wonder that the financial sector now looks at the quality merino industry as different from the standard wool industry. And we are beginning to see the direct benefits from your market positioning and direct supply strategies. Suppliers who received the direct supply contract with Smedley will get a 30% premium over the current market. That will put an extra $300,000 in growers' pockets this year.
Longer term, the goal must be to get almost all your wool into direct supply contracts such as that. Even if the initial return is actually lower than that day's auction price, it is still best to enter into contracts to supply a specified quality product, on time, every time - because the relationship, longer term, will inevitably deliver more than the spot market.
The Government's progressive change management process for producer boards is controversial. I get criticised in some parts of the country for moving too fast, and other parts for moving too slowly. And I've learnt through my political career that that middle position doesn't necessarily deliver me any votes, but it usually suggests the policy's right for New Zealand.
Nothing will change on 15 November, and change is unlikely to be implemented this financial year, unless farmers want it. What the process will do, for the first time, is carefully and sensibly pass full control of our agriculture industries from politicians and bureaucrats to farmers. Right now, parliament decides that there shall be a Wool Board and there shall be a Meat Board, and that both shall collect compulsory levies. The Government's process will pass those powers to farmers. For the first time, farmers will be able to vote to decide what industry organisations they want, and whether they want them to have the power to collect a compulsory levy. It will be for farmers to decide, but I want Merino New Zealand and its strategies to continue after changes are progressively made to the statutes governing the wool industry. It is important that planning to achieve that is underway.
You all know that the strategy Merino New Zealand is implementing has my support. It is in line with what I've been urging for the wool industry since becoming minister nearly two and a half years ago. But, today, I want to move the goalposts out further. If the auction system is guaranteed to deliver the lowest possible returns to farmers, what system do I believe would potentially deliver the highest returns to farmers, in a perfect world? Let me tell you that it wouldn't be a wool industry at all. It would be one in which we would compete directly with the major fashion houses of the world. We would buy or develop the best technologies. We would buy or develop the best design expertise. And we would compete directly with Zegna and Calvin Klein and all the rest of those high-quality, high-value international brands. Farmers would see the product they were producing as not being worth $80 but $2,000, or at least a big share of it.
Most people would say that's a pipe-dream, and, in a sense they'd be right. It is the same kind of pipe-dream as suggesting, in 1978, that New Zealand would have developed the excellence in technology and design so that 20 years later we'd be preparing to defend the America's Cup. It is the same kind of pipe-dream as suggesting one year ago that New Zealand scientists would be the first in the world to have an adult cow and its clone still living.
My vision for the wool industry may never become fully true. But the attitudinal shift involved in seeing ourselves in that industry will further improve our focus in everything we do. And it is not impossible. It is what we have to work towards. And I look forward to working with you this year, next year and beyond.