AWI looks to dig deeper into reserves

AWI looks to dip harder into reserves to ease budget pain

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CUTTING YOUR CLOTH: Australian Wool Innovation CEO, Stuart McCullough, says a revenue shortfall has triggered cuts across all marketing and research projects.

CUTTING YOUR CLOTH: Australian Wool Innovation CEO, Stuart McCullough, says a revenue shortfall has triggered cuts across all marketing and research projects.

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Reduced wool production and lower prices is causing budget pain for Australian Wool Innovation.

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Australian Wool Innovation (AWI) is likely to take about $8.5 million more from its reserves to shore-up its deteriorating revenue outlook in 2019-20.

The grower-owned marketing and research company had planned to spend $21.5 million of reserves this financial year to top-up a total budget spend of $94.8m (which includes government contributions, along with rent, interest earnings and Woolmark royalties).

But AWI's revenue has been hit with the perfect storm during the first four months of this year through a 25 per cent cut in the levy on gross wool returns, a likely 12pc slide in wool production for the year and a drop in the Eastern Market Indicator (EMI) from $21 to $16 per kilogram clean.

"They are the mathematical facts and every one of those things impacts on our budget," AWI chief executive officer, Stuart McCullough, said.

AWI had budgeted on total revenue of about $74m in 2019-20, but as of November 1, that figure was shaping-up as more like $64 to $66m, Mr McCullough said.

Revenue from the wool tax on growers was likely to slide from a budgeted $48.6m to about $37m.

AWI's total revenue for both the previous two years was above $100m as the company basked in extra tax from higher wool prices.

Mr McCullough said he would be seeking more money from reserves to cover the expected shortfall, but said the board was unlikely to agree to going any higher than $30m.

That would still leave healthy reserves of around $86m, but AWI has to retain a significant amount of money in case the company has to be wound-up.

"The reserves were built-up for bad times, that's what they are there for," Mr McCullough said.

He said cutbacks were being made across all of AWI spending programs.

"All projects are being cut - on-farm research, off-farm research, marketing, education, extension," he said.

"Human resources are being cut, too. We have probably lost 20 people in the last year. This time last year we had 400 projects going, now we have in the order of 300.

"But there is still fantastic work going on here that I am very proud of."

Mr McCullough said he had been warning of spending cuts because of dwindling income for the past 12 months.

"Supply is quite predictable, we have got the drought and can estimate the downturn in volume," he said.

"Demand is a little trickier to read, it certainly looks to be off. The macro-economic outlook in some of our biggest consuming partners is gloomy. Whether or not the drop in supply negates that drop in demand, that's the big question."

The recent drop in the EMI suggested demand was now a little behind supply, Mr McCullough said.

"It's hanging in there, it's not bad at 16 bucks, I'm quite comfortable with that," he said.

WoolProducers Australia president, Ed Storey, said the erosion of the AWI's reserves was of concern, but they had been built to help in the bad times.

He said many wool enterprises were battling through the third year of drought.

AWI's budget woes have also played into a noisy social media debate about the company's future and who should fill three vacancies on the company's board, with the result of the ballot to be announced on November 22.

There is still some fantastic work going on here (despite budget cutbacks). - AWI CEO, Stuart McCullough

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