Buyer confidence prompts forward wool market lift

Michael Avery, Southern Aurora Markets partner, July 5, 2019

A POSITIVE week of wool auctions was pre-empted by more consistent bidding in the forward markets.

A more constructive approach during the G20 trade meetings drew out some much-needed forward sales in the early spring. Processors continue to be more concerned about downstream demand than supply.

Exporters were keen to cover sales for the second half of the year. This provided some improved hedging levels with October 19 micron trading up to 1925 cents and 21 micron to 1900 cents. As both microns had dropped 200 cents during June at auction, the forward discount demanded by processors of 80-100 cents below cash looks fair value for the four to six-month window.

Although we would all like to think the market is trying to form a base around the current level, the risk to the downside is still evident.

Analyst continue to highlight the current poor global economic conditions, Wool’s current overvalued position in relation to competing apparel fibres and the historic cyclic nature of the wool market as indicators to a continued decline in prices into the new year.

When looking at a forward hedging strategy, the key factor is not trying to predict the outcome the market in the future. It may be a factor in deciding the amount to hedge at certain levels, but the strategy should be relevant to all markets. The key is margin management and locking forward returns.

If we look at wool data for the last five years 21 micron traded over 1800 cents only 30 percent of the time and at 1900 cents only 25pc of the time. Those prices should deliver varying levels of strong positive margins for a wool enterprise and can be locked in. Should we see a change in the global outlook or the stimulus in the spring sparked by the elusive uniform order to counteract the increased supply all well and good. A negative return on a hedge (if less than 50pc of the clip) is a positive outcome. Should the downward trend continue, you are partially covered at positive margins.

We hope to see a positive close the current wool season next week. This would give exporters an opportunity to sell into the early spring and summer at levels that will deliver good forward selling levels to growers.

Projected forward trading levels for next week

Month                                                19 micron            21 micron            28 micron

August                                                1975 cents          1930 cents            950 cents

September                                        1935 cents          1915 cents            930 cents

October                                             1920 cents          1900 cents            910 cents

Nov/Dec                                            1910 cents          1890 cents            900 cents

Jan/June 2020                                  1850 cents          1800 cents            870 cents

July/Dec 2020                                   1850 cents          1800 cents            850 cents

Trade summary

19 micron Septembers                   1925 cents                         5 tonnes

19 micron October                          1925 cents                         5 tonnes

19 micron December                      1895/1925 cents           15 tonnes

21 micron October                          1900/1910 cents           40 tonnes

21 micron December                      1875 cents                         7 tonnes

Total 72 tonnes


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