Ethical wool demand and the ZQ and ZQRX standards

Building value for Merino wool

Matt Hand: As you said, we're The New Zealand Merino Company. My name's Matt Hand, and I'm the general manager for global supply. You probably don't know a lot about The New Zealand Merino Company, although some of you do know a fair bit actually. We were established in the late 90s in New Zealand. The board was disbanded in the late 90s, and the Merino growers there needed somebody to add value to the Merino wool clip, and that's when we were born. That is our job. We are a marketing and innovations company. We build value and create demand for Merino wool.

You see the Icebreaker gear that I'm wearing, and others are wearing too. That was really at the advent of The New Zealand Merino Company; we created that market segment along with Icebreaker. I'm not sure where we'd be in the wool industry today without the outdoor activewear segment. But what you want to know today is: what is the demand for ethically sourced wool, what's the demand for non-mulesed wool, and why are you seeking the breeding objectives that you are?

We need to think about what we used to have in Australia and globally. We used to have this huge volume capacity to produce wool. In the early 90s in Australia we produced a billion kilos of greasy wool. Today that number is 270 million kilos, so we have dropped 73 per cent from our peak production. But think about the composition of our sheep flock in Australia today as well. We used to have a huge majority of Merinos, and of course we had a pretty good population of Polwarths and Corriedales, and we're moving away from the apparel breeds there. Now we have a tiny flock, comparably, of apparel wool growing sheep in Australia. So in order to drive markets for that wool, we need to look at how we build value.

In 2007 The New Zealand Merino Company developed the ZQ standard, which was the first ethical standard for wool in the world. That was really born around the conversation on mulesing. We accepted in New Zealand that mulesing had a limited life, and we needed to consider how we were going to address consumers' needs and wants, and brands' needs and wants, around the mulesing conversation. So we produced an ethical standard which ultimately brands sourced their wool through. The demand was feeding from brands through ZQ to growers like yourselves, and the whole concept is to align this value chain: to align the best brands in the world with the best wool growers in the world.

Having a knowledge of where your wool is going helps you establish your breeding objectives, how you are going to participate in the market and what your overall objectives are. That connection is key. It's working backwards through the market, which has not typically been done in Australia. So ZQ is central to everything that's happening on farm, but it also links these key areas: environmental sustainability, traceability, animal welfare, third-party auditing and production science. ZQ sits at the centre, supporting all of those aspects of what you do on the farm. It's also our job to make sure it's possible for you to implement those practices on farm. There's no point putting a whole lot of restrictions over wool growing if you can't actually put those requirements into practice on farm.

So in 2007 this is what we looked like. These were our brand partnerships around the world, which, even today, if we look at our competitors who have a few brand partners, is actually pretty impressive. A lot of people have one or two brands that they work with directly. In 2007 we had that group there, and you can see some of our foundation brands: Icebreaker, Loro Piana, John Smedley, Smartwool. It's grown a little bit, and we don't have enough space for them all. We've got over 120 brands today that we deal with, and those brands are all sourcing their wool through our ethical standards. They're offering their support to you to make sure they can secure the volume of wool they need to meet their growth expectations.

Moving beyond the commodity market

I mentioned before that we had to build value, and we also had to look at the market differently. This is the old volume-driven wool model. We produced wool, we stuck it in the market and we asked the market what they were prepared to pay for it. That's a commodity system; that's how we produce volume products.

It doesn't really work. It doesn't work in wool, and it doesn't work for apparel. What we need to do is re-look at that and place the end user at the centre. There's all this insight and innovation moving back and forth between everyone involved in innovation, customer experience, productivity and channels to market. That information is flowing between all of those sectors, back from the end user, so that we understand what our consumers are actually asking for. Remember, the customer is always right. It does apply in our industry; it applies in every industry. We've tended to ignore it, but not at NZM.

When you join ZQ, you become part of the two most wanted standards in the world. We have ZQ, the world's first ethical standard that we've talked about, and RWS, the Responsible Wool Standard, which I guess a lot of you know about. In brief, it's owned by Textile Exchange, a non-profit organisation, and that sets ethical standards around wool as well. It's a compliance model and it's very well recognised in the market. All of our ZQ growers pick up RWS certification in the same process.

That gives us a whole-clip approach. We have brand partner contracts, which I've mentioned, and we're going to go into a little bit more detail about that in a moment. Basically, the pinnacle is to take a ZQ contract opportunity for your fleece. ZQ also offers you RWS contract opportunities, and the remainder of your clip can go to auction with RWS certification, which means you've left the commodity market behind. Today, at that point, you'll sit about 10 per cent above the commodity market.

Dave, I just threw this slide in about 10 minutes ago, because you did make a comment that we have no control over the wool market. You threw the EMI up there, and that's exactly right. If you're participating in the day-to-day auction market, you've got no control. You'll spend 12 months working bloody hard to produce a beautiful fibre, you'll put it into auction and see how the day goes, and you'll get exporters like myself sitting in the auction room looking for an opportunity. But it is up to you how you participate in the market. You don't have to take that risk and just throw it in auction.

This is the 18.5 micron mulesed and non-mulesed markets over the past 10 years. If we look at the red line, that's the 18.5 micron non-mulesed market, and that's fluctuated enormously. The purple line is the 80th percentile. The green line represents our contracts, the ZQ contracts, for the same period of time. So if you're hoping to achieve this level at the top all the time, send your wool to auction. If you are happy with the 80th percentile, and you have a long-term contract in front of you offering that economic stability that we all love, then this is the type of product you need to consider really carefully.

This just talks about the market opportunity. The direction that you're all heading in, or already in, is that ethical wool space. It only represents about three per cent of wool fibres sold in the world today, so the growth opportunity in the ethical wool space is enormous. There's no reason not to be a part of it, because it will grow, and I guess it's probably always better to get in early rather than watch the others benefit early on.

So that's it for me, unless you've got any particular questions. We're then going to go on to Emma, who's going to talk about ZQRX, our regenerative index product. But first of all, we've got a little short video.

Tim Brown: Wool's having a moment. There is just this enormous potential for the industry. There are some challenges, no doubt, but with the sort of work that New Zealand Merino is doing, and I think in the fashion industry as a whole, there is just an enormous potential for the fibre. I think finally the industry's found a bit of a voice. They've found a way of telling their story, and I'm hugely excited about it. So, very excited to be on the front edge of what I think is a great time to be in the business that you're in.

Wool's having a moment

Emma Subtil: Thanks, team. We thought we'd use him so we could do the quick mic change. In case you missed the start of it, that was Tim Brown, who's one of the founders of Allbirds, the world's fastest growing shoe company, and a real innovator in the wool space. They're using 19.5 and 17.5 micron wool to make shoes, only started a number of years ago, and they've been hugely successful. His key message there was that wool's having a moment, and it's a really exciting time to be in this space.

There's a whole bunch of reasons that it is exciting, but one of those is this rise of conscious consumerism. There has never been a greater focus on the environment, and as a textile industry we actually have a lot of challenges that we need to overcome. The textile industry is the third largest greenhouse gas polluter. The rise of fast fashion means that the average garment is worn seven times. The rise of synthetics means that our waterways are filling up with plastic particles. There are a lot of negative stories out there in the fashion game, but this is all feeding into brands and purpose-led companies wanting to support natural fibres, and wanting to support wool.

So with all these challenges, there are a lot of great opportunities to connect with our brand partners and showcase what's actually happening on farm. Take ones like VF Corp, who own a whole range of brands, but Icebreaker and Smartwool are the two wool-centric ones. They are campaigning and heroing natural fibres and wool. Icebreaker have made a commitment that by the end of next year there won't be any synthetic materials in any of their products, and that includes zips, buttons, tags, the whole nine yards. So what we can do to really feed into that is a huge opportunity for us as an industry.

But we need to get better at actually communicating that. Matt touched briefly on certification, and don't get me wrong, audits are really important. "We all love them," said no one ever. But they are really important. We need audits so that we can reassure our consumers that what we are doing on farm is good for the environment, it's good for the animals and it's good for the people who are farming them. But there's so much more to farming than what can ever be included in an audit. If I made an audit to cover every possible thing on farm, I don't think we'd have many ZQ suppliers. I wouldn't want to be in the job, and it wouldn't fit the variety and difference, the range of businesses, that we have in our industry.

Moving beyond certification with ZQRX

So we need to have those standards to make sure that we are doing what's acceptable and what our market expects of us. But we also need to move beyond just relying on an audit system to tell our story, because a tick-box, one-size-fits-all approach is not going to suit all our growers, and it's not going to get the best value for us when we try to market our product. So how we move beyond certification, and beyond "good enough is good enough", is the next key thing.

For us at NZM, it's not just "let's do an audit", but "let's see what people are doing above audit level". So this is our regenerative index, ZQRX. We have ZQ at the centre; that's the audit standard. Farmers are doing a lot every day that goes above and beyond that, and they currently don't get any credit for it. They don't get recognised for maintaining and conserving native vegetation on farm, for investing in better breeding and management to be more efficient and produce more from less, or for managing their grazing and protecting soil health. For you guys, all these things are good business. It makes sense; it's what you want to do to protect your business for years to come. But it also benefits all of us. It benefits the consumers, and it benefits our environment.

And you should get rewarded for it. But we also have to be able to prove it. We can share these stories and pat ourselves on the back, aren't we doing a good job, but we also have to be able to prove it. That's something that's coming through more and more. Purpose is great, and having a direction and a brand with a vision has worked previously, and a lot of people have backed that. But now brands are under more pressure to be able to prove it.

So as a marketing and innovations company, which is what we aim to be at NZM, we wouldn't be doing you guys a service if we didn't provide you with the tools to measure and quantify what's happening on farm and communicate that to market. For us, ZQRX is not only celebrating what's happening on farm, it's quantifying it. There are a lot of really positive things there, but we have to have the data to back up our storytelling.

If we think about this in terms of a specific example and what it means for brands: Allbirds, Tim Brown's company, put a carbon figure on every single product that they sell. That carbon figure is based on an industry average. There's one figure for the whole industry for Merino wool. That's what they have to use; that's the technology or the data that's available. What we can do through ZQRX is go, okay, how can we measure what's happening on our farms? Let's give credit for good practice, for the sequestration that's happening, because currently the industry average won't recognise any sequestration. It's purely one half of the equation, just emissions.

So let's give credit for that. Let's capture it through ZQRX, let's incentivise and reward positive improvements, and then let's help our brand partners thrive as well. There'd be no point Allbirds putting a number out there and then never improving against it. Like any good benchmark, it's a starting point, and then we have to work on it further.

So there's that whole component of measuring and communicating these stories to our consumers. It's exciting that our brand partners are working with us on this, because I get it: it can be really intimidating and daunting, as someone who just wants to work with livestock, be outside and do what we love, to then have this wall of compliance and environmental pressures and different things coming at us. But the fact that we have these brands who want to tell our story, have our backs and work together so that we all win, that's the really exciting part for us.

With all this talk of activism and people challenging us, it's actually about bringing it back to the people on the ground, to the actionists. It's all very well people protesting in the streets or demanding action, but then someone's got to go and do it, and in our minds the farmers are the actionists. It's the farmers who are out there day in, day out, doing the work. So it's how we celebrate what you do and bring that back to the consumer that's really critical.

So, more than happy to field any questions now, and Matt and I are over here if you want to talk more about the certification stuff. We're really excited to be working with everyone, and really grateful to the Mumblebone team for giving us the mic and letting us share what we see in terms of where the trends are with ethical wool and consumers.

Questions from the audience

Audience member: Do you have a view on how the EU is potentially ranking wool or cotton against synthetics?

Emma Subtil: So the question is around the EU, but it's also the index they talk about, the Higg Index. It quantifies the environmental impact of a bunch of different textiles, including greenhouse gas emissions, water use, chemical use and a heap of other things. At the moment wool comes out in a really poor position compared to some synthetic garments. We're doing a lot in that space. We don't think it's a fair reflection, and we're working with them and showing the life cycle assessments that we've done on farms.

From a carbon perspective, the tools that they have are designed to measure synthetic items, and synthetic items can't sequester carbon in a natural system like where our sheep are grazing. I don't know how technical to get, but I'm more than happy to answer any questions on that. Yes, it's a really flawed measurement system. We're working really closely with the people who do those Higg Index scores to try and get more science into it and more robustness, and our brands are doing the same. There have been a few campaigns recently to really try and lift the information that goes into it, so it reflects more accurately what the difference is. Having a tool that measures factory inputs and a tool that measures what happens on a farm are two very different systems, but at the moment it's one tool to measure them both. Does that answer your question?

Audience member: I guess it could cause confusion for consumers. You've got the EU saying this is where things should be ranked, which is obviously wrong, but it could change what those brands might be forced to do, versus what they'd like to do.

Emma Subtil: Yes. If we sat back and did nothing, then absolutely, that would be the only information those brands have to work with, and they probably would go, recycled polyester, let's do that. That would be bad for us. So we're trying to engage early and work with our brands. If we can show the data on our farms, the Higg Index might still say that wool is bad, but our brand partners can go, yep, average wool's bad, but we know that our ZQRX wool is actually this, because we measure it and we quantify it. That's just adding value and stickiness for our brand partners. If anything, it just means that we need to work faster and harder. We're trying, but it's a massive challenge.

Audience member: What would that mean for farmers in terms of data?

Emma Subtil: Eventually access to data will be a big thing, and so will platforms to make that as seamless as possible. But a lot of it is stuff farmers are already doing that we just aren't capturing. There's a heap of tick-box stuff that the audits do require, and Ferg mentioned farm environment plans. It's just documenting what is actually happening on farm. It's really hard to get an accurate carbon number as a farmer right now, so that's something we're working on. I don't believe the tools are actually there yet to make it easy for farmers to engage in that space.

But if you do get the opportunity to be involved in any trials or to have people on farm, then figures that are as close to your property as possible are always going to be the best thing. Knowledge is power, and if you can work out where you are, that's great. But at the same time it's a really tricky space to be trying to learn in, because everyone's learning at the same time and the tools are still pretty clunky.

Audience member: And how much impact do issues around animal welfare have, like pain relief at marking?

Emma Subtil: Yeah, absolutely. When we developed the index, what regenerative wool is for us is not saying that farms have to farm in a specific way using a specific set of practices. It's much more about whole farm systems: animals, environment and people. The animal welfare stuff is still really, really critical. ZQ as an audit standard was born out of animal welfare, and that foundation will still remain. So in terms of audit criteria, non-mulesing is the very starting point, and then it's things like pain relief at marking time, animal health plans and feed plans. That is becoming more and more of a consumer expectation, and that's the starting point now, so that's a big part of it as well. RWS is the same; they require pain relief at marking time.

Audience member: At the end of the day, everyone's going to be trying to prove everything, and the risk is that there's a bit of greenwash in the space. Is there any scepticism building in the customer base, going, I don't know about that, can you show me more?

Emma Subtil: Yes, I think there's scepticism about people saying, hey, we're sustainable. Another reason the regenerative conversation came about with our brand partners is that "sustainable" was kind of an overused word. One view of regenerative is quite set in terms of what practices are acceptable or not. Another view is that regenerative just means to improve. I think everyone in their farming business wants to do better and is always striving to do better; otherwise, if you thought you were done and couldn't do any better, you'd probably retire. So for us, regenerative is continuous improvement across a whole range of areas.

But I think there's absolutely the risk of people watering it down, and that's another reason why data is really important, so that you can actually show the outcomes. You could do the same practices here, down the road and in New Zealand, and get three completely different outcomes. But the outcomes are what matter. We want good outcomes: more efficient production, a better carbon story, better animal welfare. Those outcomes, and how you achieve them, are what we want to measure.

Audience member: So you're not getting pushback yet for more proof?

Emma Subtil: No. I think brands would love us to get there faster, maybe, but we're working with them and the growers to work out what is required.