7 March 2015

Broker fees in wool review's sights

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By Cara Jeffrey - Farm Weekly

Australian Wool Innovation (AWI) has been inundated with 50 submissions to its Wool Selling Systems Review (WSSR) panel on the back of the company's recent meetings with brokers and exporters, and closure of the initial submission period last week.

Australian Council of Wool Exporters and Processors (ACWEP) president, Chris Kelly, who also operated Australian Merino Exports and United Wool Company, Melbourne, Victoria, welcomed the review as it would highlight inefficiencies and costs in the transfer of ownership of wool.

"We (exporters) feel comfortable with the review because the export trade have heavily restructured and set up our businesses to operate in the most efficient manner and we have been hoping other players in the chain would do the same," he said.

In 1979, there were almost 300 members of the Australian Council of Wool Buyers, now membership to its successor ACWEP sits at 30.

This was in line with the Australian annual production of wool falling from its peak of one billion kilograms 15 years ago to just over 340 million kilograms annually at present - a reduction of 66 per cent.

Family and privately-owned businesses now dominated the export industry as corporate companies had abandoned the industry due to high costs and low margins, Mr Kelly said.

"The reduction of services and volume of sales in the past 15 years has lead to market efficiencies with only the most competitive surviving as either a woolgrower or wool exporter," he said.

Hidden costs

Mr Kelly admitted his submission from his businesses Australian Merino Exports and United Wool Company to the WSSR panel identified dead wood in the wool selling system.

"Growers don't know what goes on in the chain with their wool, we've had a wall between us (the exporter) and the grower, and it has been the broker unfortunately," he said.

"They have hidden costs from the growers, in our eyes, that we are charged, and we take it off the price we pay in the sale because it is a legitimate cost.

"We are not saying the costs shouldn't be there but growers should be made aware that when they sell at a bales auction it is not $25 what the broker is charging it is in fact costing them $55," he said.

Mr Kelly said it appeared the domestic brokerage fraternity did not appear to have implemented any rational consolidation to match the current market capacity of today's wool industry.

"There appear to be the same amount of brokers supporting an industry that has reduced in production volume by two-thirds.

"Every other sector in the industry has rationalised but it appears the brokerage fraternity has maintained a similar if not more diverse infrastructure," he said.

Mr Kelly said to service the ever-increasing range and number of brokers there had been multiplication of infrastructure and resources, some centralised, some satellite.

The cost of this increase to service provision was expected to be absorbed through the sales transaction, he said.

"When considering ways to effectively reduce costs and make the cost between woolgrower and wool exporter more efficient we surely have to look closer at areas that have failed to consolidate over this period," Mr Kelly said.

"It seems from the wool exporters' perspective that the wool brokers have engineered a simplistic way to shift cost recovery to a charge structure, which is not subject to competitive forces," he said.

"If greater transparency and competition were introduced to these costs then consolidation would happen rapidly."

Contrary to Mr Kelly's view the National Council of Wool Selling Brokers of Australia (NCWSBA) stated in its submission to the WSSR panel, "the Australian wool broking industry is fiercely competitive in an environment of low wool production volumes".

"In response to this competitive environment, wool broking companies offer a variety of different service levels to growers which in turn results in a range of costs structure between companies. It has also resulted in innovation in broking services.

"All of this benefits the woolgrower in terms of service choices and price structures."

Seeking efficiencies

In its submission NCWSBA estimated that 90pc to 95pc of Australia wool was handled and sold by Australian wool broking companies, mainly through the auction system.

Furthermore, NCWSBA stated the financial performance of wool broking performance companies has been under severe pressure for the past decade or more as a a result of the decline in wool volumes.

In 2013/14, Australia wool production was 1.933 million bales, a decline of almost 30pc on the 2.684m bales produced in 2003/04.

"Wool broking companies have responded to this decline in volumes and higher per unit costs by seeking efficiency gains, such as reducing staff levels, outsourcing some activities, such as some warehousing and wool handling and diversifying to livestock sales, real estate and so on."

NCWSBA recognised there had been considerable rationalisation in the wool broking industry in response to the lower wool volumes, with amalgamation and acquisition of mainly smaller broking companies.

It found Australia-wide there were 14 fewer wool brokers selling at auctions in 2013/14 than in 2003/04 - a fall of over 28pc.

In 2003/04 there were 49 wool broking companies selling at auction, while in 2013/14 there were 35 wool broking companies.

There had been a decline in wool broking company numbers at all three selling regions, although the northern region had seen the largest fall from 29 in 2003/04 to 17 in 2013/14 - in line with a 30pc decline in the volume of first-hand bales offered for sale in that region over that period.

"In spite of efforts to address the fall in woolly volumes through efficiency gains, diversification and amalgamation and acquisitions, the increased costs have inevitably led to increases in the charges levied by wool brokers on their grower clients and on buyers for services provided. Competition between broking companies has contained these increases," NCWSBA stated in its submission.

Interestingly, NCWSBA stated that as an association representing competitors it had not and cannot investigate or collect any data on the fees charge by its wool broking members.

General policy-based comments were made in its submission that the auction system was not the most cost to woolgrowers in transferring wool from ship to sheep - it was in fact wool harvesting, at 62pc of the cost in 2009/10 (according to the latest data available) and broker costs and purchasing costs accounted for a combined total of 20pc of the cost.

"The wool broking industry is not unique in charging both seller (grower client) and the buyer," NCWBSA stated.

"There is no legal or economic reason why there should be a charge only on sellers (the grower) or solely on buyers. It is likely that the current charging arrangement by wool brokers reflects custom and administrate convenience.

"There are many wool broking costs which are uniformly incurred on all bales, and there are also activities and services which cannot be unequivocally assigned to either grower or buyers."

As a result, some costs are recouped through a charge on growers and others are recouped on charge to buyers (such as a Buyer Services Charge - called the 'Post Sale Charge' in the WSSR panel issues paper).

Broker fees in wool review's sights
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