More $ for NZ wool growers? - John McWhirter

0:00This is a podcast from Rover. Wolves of New Zealand has launched a new training trading model, which is designed to link wall growers more directly with international customers, and that's hopefully going to ensure more value. We'll flow back to the farm gate. So Wolves of New Zealand's head executive John McWirth had joined us now to talk through the details of this, and it's lovely to have you on again. John, how are you? I'm good, thanks. And thanks for having me, John. I appreciate it. Yeah, now we were talking about this one in one of our meetings, and we thought, well, OK, this could represent some better value for farmers. So how does it work? Well, I think I'll give you the background to why we're doing what we're doing. I mean, it is, I'll use it exciting to see wall prices having risen rapidly in the last six or really probably four months. But with that comes potential problems, because one of the most difficult things about rapidly rising prices

1:01is uncertainty with the customer base leading through to the international retailers and their brands. And so it causes disruption through the supply chain around margins. And so while it's good the prices are rising, and we'd like to think that they continue to rise, we need to build into the model that trains X wall, more certainty and security around price and supply for both the seller being the farmer and the customer purchasing it. And so we've had a number of issues that we've had feedback on with the rapid rise. The first one is around on pain more for my wall, but I'm getting less quality. And it's really concerning that farmers work hard to present their wealth when it's been shorn, separate out the good from the bad.

2:02And to find that it actually gets all blended back together to create a cheap product that's pushed a soul through to an international customer. We've had some recent experiences with our people sitting in the office of these customers where the customers discovering that the blending and the short fibres and all the things that are going into what they're buying is reducing the production yields and the pain more and getting less. That becomes a problem because when that happens to you as a manufacturer you go, I've got to solve this and there are a number of ways to solve it. The other problem is that we've had some customers saying, well, our ability to pass it on to, with our contracts and our pricing arrangements to our retailers is limited because we've got contracts in place for a set period of time. And they've actually asked us to help them talk to their customers for giving them information

3:05so they can get their customers to understand that the reason why the price is going up is coming from New Zealand and wool production and wool prices, not from them seeking to gauge margins through to their retailers. So they need help to do that. And when the market changes rapidly, margins get squeezed and pushed in. So that leads to the third issue is that what the manufacturers start to do is looking at how they can blend cheaper materials with the yarn and then through the manufacturing processes to reduce the overall cost. For example, they might be using our 60-40 blend New Zealand wool versus some other wool. They switch it to a 40-60. So all of this impacts on the long-term demand and support for New Zealand wool.

4:06So this is driving us to look at how we might actually create some certainty of supply, its supply of quantity and specification and quality and also certainty around price. So the reason why we've come up with the direct discovery was to allow us to move forward and actually create longer-term contracts directly with farmers. Because if we can do that, we can create a certainty around supply and pricing. At the moment, wool generally is sold as a commodity and it rises and falls. And anyone will recall back in about 2016 to 2015 the price was about probably similar a little bit more than it is today. And it fell rapidly and stayed down for basically a decade. It moved around a little, it started rising probably about two or three years ago.

5:07Small rises. COVID, of course, was the bottom end at sort of $2.00 a kilogram now, we're at $5.50. And from a farming perspective, I mean that's income. From a New Zealand perspective, that's foreign exchange earnings. And what is really exciting for both the farming community and New Zealand is that the increase in the price over the last six months has added. We've estimated around quarter of a billion dollars with the foreign exchange earnings. So that will help pay for the petrol. So I mean, that's important for the whole country. And we understand farmers will spend money and invest it into their businesses and into local communities, which goes around the total community. It's important that we're able to actually build that certainty of supply in. So what we're doing here is sending up a relationship with the farmers that trade with us.

6:10And anyone else that wants to, whereby they supply us their will, we test it, we understand what it is, and then we sell that to a customer somewhere in the world. Either as an agreed contract or an agreed price, and then it's co-funded down through the supply chain. And which leads to the other major point that is actually striking the industry, is that the price of all is risen from, you know, COVID $2. Let's say $2.50 has been the last sort of five years through to $5.50. I mean, massive pressure on the working capital within the supply chain. And the reality is that the market place, the closest marketplace for New Zealand is about two months, you know, maybe around three months when you actually have a certain New Zealand and eventually supply it through to our customer in China. You know, it goes to three and a half months, it goes to two and a half months.

7:12If you go to India and it goes on to three plus months, if you're getting through to Europe. And particularly if you're going around the bottom of Africa, then you can be looking at more than three months. So, so much cash flow will add. And if you just look at the Wilson New Zealand inventories, that is the will that we own. We had lessen stock at the end of February, but we had a significant increase in our working capital to a carrier than we did the prior year. So, you can work out that everyone in the supply chains is we're in the consequence of that. So, what that also means is if we expect to get will from $5.50 through to $6.78, $9.10. And I'm delighted to say that we actually do have a contract in place with a customer that has agreed to strike $10 down the line. Wow, and a few years time. So, it's an annualized growth agreed contract.

8:13But if we want to strike those sort of numbers, then the working capital that's going to be able to pay for it is not there. So, at the moment farmers sell the will and they click the money 11 days after it sold. And that's great, except the fact that if we're talking, you know, getting through to those sort of numbers, the money to pay them 11 days, it's just not going to be available. And of course, we don't know what the cost of that money will be in years to come either. So, the whole direct discovery contract is based upon a shared payment process and sharing in the contract and supplying that will from essentially from the farm. Farm to factory is what we're actually terminate. And farmers using some of their working capital to actually do that and also receiving cash, so they can actually pay their sharing bill. So, it's sharing in the process and it's us passing back more value to the farmer.

9:19And it's often, we often talk about, you know, capturing more value at the farm gate. This is definitely intended to do that. And so, that's what we've been putting in place. And we've had quite a lot of farmers actually engaging in it. But what is most important here, Dom, is that we get to a point we're able to forward contract. So, a farmer will know what his price is going to be. He can sign off on that, he knows what he's going to get, he knows he's going to make some money. And he knows what he has to deliver on a certain date and how that will actually transact through. And I think if you look at the world as it is, particularly today, you would have to say there's a degree of uncertainty out there. Just a little. And so, if you're able to actually commit to a contract and know that you're going to get paid ex in six months' time for what it's going to be harvest, harvest it then it creates that level of certainty and confidence.

10:25And I know there's a manufacturer in my previous role. It was extremely important to us as a business that we had certainty of supply and price on the raw material as we were buying for at least nine months out. You know, you can afford to have sort of maybe 10 or 20% of that risk, but you certainly don't want any more than that. So, it's just as important for manufacturers to have certainty of what the future looks like is for farmers. So, that's actually where we're heading in the long term. And we're asking farmers if they want to extract more value to accept that they're going to have to use some of their balance sheet to actually do that. Interesting. So, it must have been that you would have... Did you test the waters on this with how many people might be interested before you just go, hey, he's an idea. I suspect you would have done a bit of classic market research with some more growers beforehand.

11:27Well, we're a bit lucky because we know three and a half thousand farmers. Right. And so, the answer is yes, we go and talk to farmers. And I think what I'd also say here is to quote our chairman, Richard Young, is this won't be for all farmers. And you don't have to put all of your clip into it. You can do a portion. And so, it's horses for courses, so to speak. But what we have got is a strong level of support and engagement for farmers wanting to do it. And I think the most important piece in here is that genuine farmers don't want to do it. They're either in a financial position, doesn't allow them to do it. And look, we're all in that situation from time to time. And we appreciate that. Or it comes down to a meaningful discussion to explain how it works and why we're doing what we're doing for the long term benefit of the industry.

12:28And that generally comes down to a one-for-one conversation. And when farmers understand that they go, okay, that makes sense. So, a lot of it is just industry understanding and the supply chain of how it works. That supplies to all of us. If we don't understand what happens later, then we're making decisions based on our view of the world. Yeah, it's a good point. And I know that you've been around, you know, AMP shows and field days and recent times. And you're sort of putting this idea out there. So, in those dealings with people that are talking to you about it, what's been the most sort of common reaction or what is the reaction from people? I mean, you said that, yeah, once you explain it, they get it. But what are some of the questions you're getting asked in and around it? Well, not one farmer struggling to understand it has to be frank. So, we are 100% hit rate. That's good. I mean, the kind of responses that some aren't in the position to do it.

13:32Understandable. And other farmers say, well, why don't you take all the wool? And I'll give you a hole. Do the whole lot as a credit. And I'm going to get her off. So, you get everything from, I'm not in the position to do the whole lot. But I would say strong, warm support and a deep understanding, certainly with all the farmers I've spoken to and my team spoke to, of what the long-term strategy is here and what we're trying to achieve. Because the reality here, Dom, is nobody. Absolutely nobody wants us to end up back in the last decades drought. And I think it's easier to sit here and say, oh, well, we've got to $5 and, you know, at least I'm paying my sharing bill and making a bit of money now. And sort of sit back and relax, expecting that to continue. But I know from my own personal experience in business over years, is that you have to ensure that you lock in the gains you make

14:34and the systems, the structures and the processes that actually hold that in place. You know, I mean, the Kelly Fred industry is a good example. I've been able to lock in the disciplines to capture value and hold it. Well, that's what the whole industry needs to do. So, there's still a lot of work to do. But at least we're on the journey and we're hitting the right direction and we're getting some profits now back to the industry. Yeah, well, at least, you know, you're talking, as you say, somewhere in the 5-10s as opposed to the 2s. So, you know, I mean, that's a marked improvement already, isn't it? So, that's certainly good to see that. And we have noted on the show that, I think you might have said at the start, certainly in the last few months, we've started to sort of see the dial turn away, but on that. So, I guess that is a positive, you know. But as you say, it's kind of sureing that up for the future because there's always peaks and troughs, isn't there? Look, I think it'd be foolish to ignore the fact that there are peaks and troughs.

15:34We just don't want the trough to be $2. Yeah. I think that's the important thing. I think the other thing that we've been working on, which is important, is growing the demand for wool. And of course, we approach it from a wool carpet perspective. And at all of the shows we've been at, obviously, the home show is definitely there. We're pushing carpet and selling carpet. But all of the shows this year have actually shown an extremely strong support for wool carpet. And I had people come on this Dan and talk to us. And you sort of think you're going to have to talk a little bit about why wool versus some solution got nylon. And they all said, well, I'm already, I just want wool. You don't have to convince me. Yeah. And I've been absolutely excited and void by the positive response we're getting to people wanting to buy wool carpet. And all the shows have been an attendance set.

16:35Now, some of them are agricultural and you would hope that agricultural people would support wool. But the likes of the home shows are not. Yeah. They're in an urban setting, Christchurch and Auckland places like that. But what we are finding is that the desire, the willingness to spend what's required to get wool carpet actually seems to be increasing. And you see, that's really important. I think John, because this is something that we've been talking about for a long time, is that the ag industry, wider ag industry is very good at, you know, sort of promoting these things, but almost within house, you know, kind of preaching to the converted really, but to see that start to bleed out into the, into the urban environment, that's kind of the, that's a little, that's a victory in this, in this overall kind of, you know, quest, isn't it really? Oh, not a wee victory. It actually feels like a big victory. Yeah, true, true.

17:35Because changing, getting people to understand the benefits of wool or why you would have wool carpet over synthetic carpets is a major step forward. And, I mean, one of the problems through the supply chain, retailers, has been, and farmers still tell me, still is, that they walk into a shop on the shop, still tries to sell them a synthetic carpet. You know, everyone, I won't say, I won't say where it is in the South Island, where a big farmer was trying to buy wool carpet from a retailer, and the retailer was determined to sell them a solution diet nylon product. And you sort of go, well, look at your, look at your customer. It might be a hint here. Because he wasn't able to borrow it. But quite frustrated because you had that experience. So, yeah. Yeah. We're looking your step up on how we actually change that this year.

18:35Because there's no question there's a momentum here, and once you've got it running, you have to keep going. And always, always sort of quote the amount of money spent by one of the largest brands in the world, Coca-Cola. Yeah, they started spending money in the 1930s, and they're still spending it on building their brand, and retaining their brand. So, you can't stop spending, you can't stop investing, you just got to keep going. Yeah, it's a very good point. And I think that the retailers will certainly come up all once the customer base starts asking for a certain thing. As if they didn't kind of pick up the, you know, the slack on that you would have thought. You would think. Yeah, don't get me wrong. There are retailers that are enthusiastically selling wall carpets. Oh, yeah. No, we've just bought. Yeah. We've just bought some. So, no, and yeah, great experience in doing it in plenty of options too, which is, which is great. Yeah, I'm sure they will jump on board.

19:35So, then the question is, if the, say, urban part of New Zealand is now starting to get the message that's been pushed for a long time about the benefits of walling in particular with the carpet there. How is that being received overseas? And obviously, you know, China being the big market. But is that, you know, you see that reflected in other markets as well, not just domestically? Yes, we are. I mean, some of those countries we sell into have been strong supporters of wall flooring. So the UK market has always been a strong supporter. And so, but you're asking, I don't actually have any statistics. But from what we're gleaning out of Australia, there seems to be a strong demand for wall carpet. And so, and certainly in China, I mean, we're working with a company, a brand called Subozy. They do wall rugs in China.

20:37And they're just seeing that growing exponentially. So we've partnered with them. They actually sell Subozy rugs with the walls in Zealand brand on it. Because they like the heritage and the provenance back to New Zealand. They've been on our farms in New Zealand shooting video of sheep dogs running around and chasing sheep and things like that. And as an example, we had Richard Yang out here was up there last year. And he did a 15 minute segment on their on their on their social media platform, which actually sells direct. And he sold, well, in the 15 minutes, he was on there. They sold nearly a million rupees, but you're from of New Zealand wall rugs. I'm real. So we said, well, send your back. We'll just leave you up there. Yeah, just keep him there. Just keep him on the social media for, you know, an hour a day. You might, you might shift millions. Yeah. Yeah.

21:39That's really good. So the direct discovery contracts then. Obviously, you're just betting it in now. Is there enough enough support initially? I mean, I think you mentioned you're still looking for people to get on board. So you just want momentum with this now, John? Well, that's right. That's really where we're getting to. We've proved it. We've been selling back to back containers of wall against it. And we just need to step it up. And as you say, the meantime is the word. And and be able to pass that value back through to farmers. And then start. As we move into the off seat because we're obviously in peak of half. It's at the moment or getting towards the end of it. But I'll actually start forward selling that wall. So that farmers and it gives the farmer a target to hit in terms of spec. Because we know what they they and we both know. And what they produce last year and when it comes off farm. So subject to the variations of weather.

22:39You know, you can be reasonably accurate in terms of what's coming. So, yeah, we just need to step it up now. And all farmers, all farmers are welcome. We just, as always, been selling owned by the farmers. We're here to track better value for at the farm gate. That's otherwise well will be exist at the beginning point. Yeah. Yeah. Yeah. Well, exactly. Well said. And that sums it up perfectly. So onwards and upwards then with the direct discovery contracts. Go and check them out if you're interested. Talk to some people about it. And yeah, it's good to see that the message is starting to get through beyond the rural sector that, you know, will carve it's a good thing. And will in general is a wonderful five. But John, thanks for the explanation for all of that. It's nice to catch up again. Appreciate it. Thank you, John. Appreciate the opportunity.