Mecardo Analysis - How much is the wool levy worth to you?
- By: "Farm Tender" News
- Ag Tech News
- Oct 30, 2018
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By Andrew Whitelaw | Source: AWEX, AWI, Mecardo.
In five days’ time, voting will close to determine the levy paid by wool producers for the next three years. Australian Wool Innovation (AWI) is the only major industry RDC which provides levy payers with the option to democratically choose the level which they pay. AWI stalwart Michelle Humphries asked us on Twitter what the impact of a levy change would be on wool producer’s pockets.
The 2018 WoolPoll provides levy payers with five options; 3%, 2.5%, 2%, 1.5% & 0%. At present AWI are recommending the status quo at 2%, while WoolProducers and numerous state bodies are calling for a reduction to 1.5%. In this analysis, we will only delve into the 2% and 1.5% levies, as other options are unlikely to be chosen.
AWI chairman Wal Merriman commented in the Senate estimates that a reduction in the levy to 1.5% would leave the organization insolvent. This comment was later reversed by AWI CEO Stewart McCullough, who commented that 1.5% would not make them insolvent but would require ‘trimming’.
In the past ten years, levy revenue has increased by 61%, from A$45m to A$72m. There are also other revenue streams (Govt & Woolmark), which bring the overall income received by AWI to A$103m, versus A$75m a decade ago.
Expenditure during the past ten years has averaged $70m, with a strong rise in spending in 2017/18 (↑$17m). The reserve in recent years has increased dramatically, from A$71m a decade ago to A$122m (Figure 1).
I’ll leave it up to you to decide whether AWI will become insolvent or not because of a 0.5% reduction in levy income, or whether it would just require a tightening of the belts.
As mentioned in the preamble to this piece, we were asked to work out the impact that a levy change would have on the pockets of wool producers based on the wool clip value of the average producer. We decided that this would result in a woolly outcome, so we opted to relate this back to a more relatable point. The value per bale.
In this analysis, we have used an average bale weight of 115kg and the EMI as the benchmark for determining the overall levy paid to AWI. The levy per bale for a 1.5% and 2% levy is shown in Figure 2 (animated), with both the deflated and nominal pricing.
By deflating to consider inflation, this gives an indication in today’s money of what levy per bale is paid. In deflated terms, a 2% levy would on average have resulted in an A$28 per bale levy cost, versus A$21 with a 1.5% levy since 1991. At present, the levy is A$46 per bale.
Figure 3 has been produced to clarify the difference in cost per bale over time between a 2% and 1.5% levy. At present, the difference between levies equates to A$11 per bale, well above the long-term average of A$7 per bale difference. Due to the high prices, a lower levy rate has a much bigger impact on the producer’s pocket than any time since 1991.
Key points
* The WoolPoll provides growers with an option of paying AWI 3%, 2.5%, 2%, 1.5% & 0%.
* AWI recommend 2%, whilst WoolProducers, VFF and WAF recommend 1.5%
* The approximate levy income per bale at present is A$46
What does this mean?
It is not our place to say how levy payers should vote. There are enough commentators with their own view on that subject.
Although there have been some comments which have been considered scaremongering regarding the viability of AWI to survive with a 1.5% levy, I do not think this is the case. Due to the very strong reserves, it may require the organization to become more efficient. However, at present many producers are having to do this with their own businesses due to the poor weather conditions.
At present pricing levels, a 0.5% drop in levy would equate to around A$11 per bale going back into your own pockets. As a producer, you need to decide whether you think it is better in your direct control or with AWI.
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