How did Australia and New Zealand, the two biggest exporters in the world sheep industry, collapse?
The downfall of the wool industry was created in the late 1980s and by February 1991 it had self destructed with huge losses.
This was caused by the introduction of a guaranteed minimum floor price in 1974.
Unfortunately this was never going to end well as when the seller is the buyer there must be a way out.
At the time the wool industry was the backbone of our farm industry. The wool crash not only affected our economy but economies all over the world.
The minimum floor price gave artificial confidence to wool milling businesses as they now saw little to no price risk and began purchasing forward and increasing stockpiles.
At the same time farmers bred more sheep and produced more wool. The floor price had increased by 70 per cent by 1991 and the defunct Australian Wool Corporation (AWC) had created a stockpile that would crash the industry.
The AWC was one of the biggest company disasters in Australia’s history and when the reserve price scheme collapsed, farmers and wool related businesses all went broke.
Key processors in England, Germany, France, Italy and Eastern Europe went out of business.
It has taken 27-28 years for the industry to rise out of the ashes and with it has come specialised growers with a focus on genetics.
The industry was then fortunate to have China invest heavily in new textile technology, factories and machinery. The Chinese now buy 80pc of our clip.
The engine room of meat processing were the abattoirs and it started with small slaughter yards across the regions.
The government then thought council-run abattoirs were the future and built large multi species plants which tried to service more customers then they could handle.
This saw too many meat processors and a huge amount of brands that changed weekly.
Processors had to sell meat at low prices to stay competitive. They cut corners by packing cheap and poor quality products and relied on rebates to keep going. This led to poor management and low quality as councils had no experience or knowledge in competitive business. The industry then saw the demise of the large meat processing companies.
In the late 1980s NZ was the world’s biggest lamb producer. Its government then decided to acquire all NZ’s lamb and mutton.
This gave farmers unwarranted confidence and hence lamb production soared. As fast as they could produce lamb they were putting it into cold storage around the world and this completely collapsed the market with even Australia importing NZ lamb.
Australia had to sell 85pc of its lamb output on the domestic market as the export market had been destroyed.
Interfering with commercial industries can be very detrimental and, as we saw with the reserve wool price and the acquisition of NZ lamb and mutton, the repercussions can take years to recover.
You cannot run artificial markets and the above is a prime example of the seller becoming the buyer. Governments should stay away from controlling the market and focus on market access, roads and infrastructure.
But we’ve come out of the ashes with an exciting new industry, in which I will examine in the next column on how we got there.