Wool Board finances sink: loss of $1.7M for 1982-83

Press, 19 August 1983, Page 19

Wool Board finances sink: loss of $1.7M for 1982-83

From

HUGH STRINGLEMAN

in Wellington

Meat and Wool Electoral Committee members were left in no doubt as to the parlous state of the finances of the Wool Board at the annual meeting of the two bodies in Wellington this week.

In the middle of his presentation of the board’s 1982-83 accounts, a director, Mr P. M. McCaw, paused to ask: “Is everything clear?”

“All too clear,” was the chorus of reply. Mr McCaw disclosed that the Wool Board made a net loss for the year of almost $1.7 million. The actual total loss was $2.18 million but it was partially offset by the sale of fixed assets and other non-recurring investments of $495,000. The overwhelming factor in the board’s income and expenditure over the past two years, said Mr McCaw, was the intervention stocks.

They were reduced from 422,000 bales in June, 1982, to 285,000 bales in June, 1983. “The board’s stock holdings have been high in the past two years and accordingly interest earnings have been insufficient to meet the administration and other expenses of the board,” he said. The major increase in expenditure during the past year was in financial expenses, mainly incurred in holding wool stocks. The board sold wool worth $83.6 million, which generated a gross profit of approximately 4.4 per cent, but after meeting holding and freight costs a loss of $621,000 on wool trading resulted.

“The balance of the loss, (on wool trading) of $1.56 million, stems from increased interest charges

and reduced interest income, both of which are closely related to the size of the board’s wool holdings,” he said.

“But the position could have been much worse. “Let us assume that prices had not improved in early March of this year and the stockpile had remained at its beginning of the season level. "Then there would have been no gross profit on wool trading and other direct costs of storage and insurance would have been increased. Therefore the ultimate loss on wool trading could not have been less than $4 million. “Also income would have been reduced by at least $3 million, because of funds earning interest which would have been otherwise locked up in wool stocks. The end result would have been a loss in the region of $lO million. “I emphasise what could have been the position because it illustrates that the holding of stocks at anything approaching the level at July 1, 1982 for any length of time is unsustainable without seriously reducing the financial resources of the board.” He believed that, in times of high inflation, a profit for the year of less than about $lO million could not be regarded as satisfactory. .

“Because with the increased prices for wool which we all expect and hope for, the ability of the board to purchase stocks to a level even beyond 300,000 bales will not be possible without placing its funds in a vulnerable position,” said Mr McCaw. The chairman of the board, Mr J. D. Mcllraith,

then stressed that the board still had overseas borrowing facilities which it would not hesitate to use to buy intervention stocks if required.

“The board is determined to get itself into a position to be able to intervene at the levels of the past so that the trade kndw we will not crack,” said Mr Mcllraith. He was explaining that Mr McCaw’s warnings about finances did not mean that the board would be unable to intervene to lift its stockpile over 300,000 bales. However, discussion of the precarious position of the board’s own income and expenditure was quite apart from the considerably more serious position of the minimum price fund and its relationship with the promotions and research expenditure overseas with the International Wool Secretariat and in New Zealand. The board has made it clear that the income of $32 million expected this year and possibly next from the 3 per cent promotion and research levy on wool growers will not be enough to meet budgeted expenditure on I.W.S. New Zealand’s share of I.W.S. expenditure has risen because the size of our clip has risen and because the funds are payable in Australian dollars the steadily weakening position of the New Zealand dollar has lifted the I.W.S. contribution payable. Thus the board advised that it would have to reduce the 1984-85 contribution to I.W.S. by SNZI3M to $32 million. It will be apparent that even at that level the I.W.S. contribution takes the whole of the P. and R. levy collection, leaving none for the work of the Wool

Research Organisation of New Zealand and the market development research division of the board. Mr McCaw revealed that during 1982-83 total income in the Wool Board levy account (mostly from the P. and R. levy or Wool Board levy as it is known) was $36.7 million and total expenditure $42.3 million. The excess of expenditure over income resulted in a draw-down in accumulated funds held for promotion and research of nearly $6 million to a final balance of $l7 million. As New Zealand’s contribution to I.W.S. in 1983-84 had been fixed at S4SM (while levy income was budgeted at $32 million) a further draw-down of P. and R. reserves of perhaps $l5 million was inevitable.

The draw-down this year would probably exhaust reserves, said Mr McCaw. In effect, apart from fixed assets, the board will have no reserves by the end of this wool selling year. That was why it had to advise the I.W.S. partners (Australia and South Africa) that New Zealand’s contribution had to be reduced in the following year. The board is now trying to ensure that such a cutback in New Zealand’s promotional effort in coarse wools overseas does not extend beyond June, 1985. It was told by the Prime Minister, Mr Muldoon, that it could not come to him with a proposal to lift the 3 per cent P. and R. levy until it was confident of the approval of 80 per cent of wool growers for such a move.

It is still by no means clear that the board would have such a level of apK 1 to lift levies, but the did approach the Government with a proposal

to lift the P. and R. levy, only to be told that the minimum price levy must also be doubled to 2 per cent. Mr Muldoon also wanted the board to lift its minimum price for this season from 250 c per kilogram. It was clear that he wanted the board to assume more of the responsibility for supplementing growers’ prices. After negotiations Mr Muldoon did raise the M.P.F. levy (which is his perogative) but the board’s minimum price has remained at 250 c. The board has retired to regroup around two alternatives for providing more levy income for the I.W.S. contribution in 1985-86. It intends to take these alternatives to either meetings of growers or a combined meeting of the Meat and Wool Electoral Committee and the Meat and Wool Council of Federated Farmers later this year. The 2 per cent M.P.F. levy will now restore the minimum price fund to about $7O million next June, which is near the level considered adequate.

“Given that the board can persuade the Government at that stage that such a level is adequate to meet the purposes of the fund, it appears to the board that, if growers also agree, one of the following courses of action could be pursued (to lift the I.W.S. contribution),” said Mr Mcllraith.

® The 2 per cent M.P.F. levy then be suspended so that the promotion and research levy can be increased to 5 per cent. © Should the Government still require a one per cent M.P.F. levy then the extra one per cent be transferred to increase, from 1984-85, the P. and R. levy to 4 per cent. Also growers be asked to agree to increase levies over all to 6 per cent, thus allowing the P. and R. levy to be at 5 per cent, as under the first choice.