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Thursday, October 31, 2019

AWI revenue set to crash

By Andrew Woods  |  Source: AWI, AWEX, ICS

Key points

  • As of June, AWI projected a fall in revenue for 2019-2020 of 27%. With the benefit of time, revenue appears likely to fall between 34% and 48%.
  • AWI expenditures ran at 98% of revenue in 2018-2019, so a big gap between revenue and expenditure will open up in 2019-2020.
  • The fall in revenue is a function of lower wool volumes, lower wool prices and a lower wool levy.
  • None of the factors causing the lower revenue are likely to turn around substantially in the next couple of years.

2019-10-31 Wool 1

2019-10-31 Wool 2

2019-10-31 Wool 3

With greasy wool supply under downward pressure due to dry conditions and wool prices under downward pressure due to weaker demand, revenue for AWI which is primarily dependent upon wool levy income and government contributions (matched to R&D activities and capped at 0.5% of the gross value of the national wool clip) is set to shrink. This shrinkage is compounded by a lower wool levy rate, reduced from 2% to 1.5%. This article puts some numbers to the projected fall in revenue.

In the past five years, revenue for AWI has risen from around 70 million dollars to 100 million dollars. Figure 1 shows annual revenues and expenditures for AWI from 2008-2009 to 2018-2019. Expenditure has lagged the increase in revenue but by 2018-2019 expenditure had lifted to be 98% of revenue. The 2018-2019 annual report for AWI (View here) forecasts expenditure to be 95 million, down by 4 million in 2018-2019. AWI is projecting revenue in 2019-2020 of 74 million dollars. The AWI budget expects that reserves of 21.5 million dollars will need to be used to plug the projected gap in the budget.

In June AWI had to project a level for the EMI in 2019-2020 to base budgets upon. AWI settled on 1800 cents, which was the June average price. What makes this projection particularly risky is expenditure sitting at 98% of revenue. Figure 2 shows the EMI running from 2009 to this month. It has the 1800 cents budget level overlaid along with the actual average EMI to date of 1553 cents. From the perspective of late October, the average EMI of 1800 cents looks to have little chance of eventuating.

The wool levy is dependent on the volume of wool sold and the price it is sold at. At this stage, it appears the volume will be down by 10-15% this season, say 12.5%. The EMI is currently running at 20% below the 2018-19 average. The combined effect is a 30% fall in value of wool sold. In addition, the wool levy has been reduced from 2% to 1.5% this season, a reduction of 25%. The combined effect of lower volume, lower price (season to date) and lower wool levy is a fall of 48% in wool levy income for AWI in 2019-2020. A rebound in the EMI would help to reduce this but the combined effect of lower wool levy and lower volumes looks to have locked in a minimum fall in wool levy receipts of 34%.

Figure 3 puts the projected fall in wool levy receipts in context. It shows the wool levy collected since 2008-2009, with the ICS projection for 2019-2020. Overlaid is the proportion of AWI revenues accounted for by the wool levy. As a rule of thumb the wool levy accounts for around two thirds of AWI revenue. When the government matching contributions are added in, the proportion of revenue climbs to around 90%. Basically wool levy revenues are back to levels last seen a decade ago, and the AWI gross revenue will be following a similar path.


What does this mean?

Wool levy receipts are likely to fall from around $68m last season to between $45m and $36m this season (down 34% to 48%), with the fall more likely to be toward the larger end of the scale. Gross revenue will reflect this fall, as the wool levy is the main component of revenue for AWI. Looking forward, there appears little hope that revenues will rebound significantly in the next few years

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