The 50 million sheep of New Zealand outnumber its people 13 to 1, the highest such ratio in the world. At the wool industry’s peak, in the 1950s, the wool growers of that country delivered 40 percent of its total export revenues. Yet this figure has now fallen to less than 4 percent, with a proportionate drop in the industry’s profitability and pride. New Zealand accounts for 14 percent of global wool production—second only to Australia, with 31 percent—and is the world’s largest producer of "strong" wool used mostly for carpets. But for the past 20 years, competition from synthetics has driven down the price of clean strong wool by an average of 5 percent a year, to $1.90 a kilo, from $7.30.¹ At the same time, production has dropped to 135,000 tons a year, from 190,000 tons, as farmers switch their land to other uses. Thus wool has fallen behind beef, lamb, milk, butter, cheese, fish, fruit, and wood and pulp as an agricultural export earner.

In a study of the industry’s prospects, McKinsey concluded that the route to profitability is improving productivity rather than raising wool prices. Pointing to the long-term decline in agricultural prices and to the failure of generic consumer promotions of wool to arrest it, the study urged the country’s 16,000 commercial sheep farmers to achieve the same kind of annual productivity gains—5 percent or more—that manufacturers of synthetic materials have recorded. This goal could readily be achieved if the industry as a whole adopted the management practices and breeding technologies of the country’s leading (and comfortably profitable) wool growers.

The New Zealand Wool Board’s expenditure of NZ $1 billion (US $395 million) to promote wool over the past 20 years has had little if any effect on its price, the study found (Exhibit 1). Furthermore, the country’s wool growers pay for promotions of wool to the trade and to consumers but receive only between 2 and 5 percent of the end-product’s value, with yarn spinners, manufacturers, and retailers taking the rest (Exhibit 2). Promotions paid for by primary producers are likely to succeed only if there is relatively little processing of the product before consumption, as in the case of meat and dairy products. Yet wool growers pay proportionately more to promote wool (Exhibit 3).

McKinsey recommended the dismantling of the Wool Board and the return to growers of part of its NZ $116 million in reserves. The rest of the reserves could be invested by growers in new commercial-marketing and -breeding businesses.² Growers would benefit immediately through a drop in the wool levy from the current level of 5 percent of wool sales to the 1 percent needed to finance research and the transfer of skills for improving farm productivity.

The study proposed the formation of a new commercial company to take over the assets (including the people, the brands, and the intellectual property) of the Wool Board’s marketing arm. This new company would then market premium New Zealand wool to customers in high-growth segments that are prepared to pay extra for a high-quality (in other words, cleaner and stronger) product. Growers would receive dividends from the company as a supplement to their earnings from the sale of wool. But any ongoing investment that growers decided to make in the company would be voluntary; compulsory levies to finance promotion would cease.

Important though these steps are, the only reliable road to success in agricultural enterprises is to improve productivity. Gains on the order of those achieved by the world’s cotton growers—who on average have been improving productivity at two to three times the rate of wool growers—can come wholly through better farm management. At present, wool growing in New Zealand, like agriculture everywhere, is divided. On the one side are professional operations that exceed market returns on capital and skill (30 percent of farms achieve double the average profitability, and the top 10 percent are three to four times more productive). On the other are family farmers willing to receive a substantially lower return to maintain their familiar lifestyle. This huge gap exists even between farms in the same districts (Exhibit 4).

To encourage productivity, the study recommended the establishment of a commercial genetic-research company (which would concentrate on genetic selection rather than genetic manipulation) and of a new organization that would combine the currently separate research programs for wool and meat. This would represent a shift in R&D spending away from efforts to improve wool’s processing efficiency (for example, by lowering spinning costs) and toward efforts to cut the cost of producing a given unit of wool or to increase the volume or quality of wool produced from a given quantity of inputs. Enormous gains in productivity could be made through genetic improvement: the best of New Zealand’s sheep produce wool and meat worth 50 to 200 percent more than the wool and meat of the country’s average sheep. These superior sheep can be identified and kept as breeding stock. To accelerate the pace of such improvements, it was also suggested that the Internet could be put to greater use, for purchasing inputs, selling wool, and transferring know-how.