Forward and spot auction wool markets suffering pipeline risk

Michael Avery, Southern Aurora Markets partner, March 22, 2019

IT was a disappointing week all round for the spot and the forward markets, although the week started firmly with reports of modest demand following last week’s retraction in prices.

Buyers grabbed nearby cover at small discounts to cash. The forward market gap between bid and offer widened as growers stuck firmly to cash levels out to June. Buyers unable to attract offshore business at these levels are bidding conservatively.

Early indications of the market finding a base were quashed on Thursday as the market continued its downward trajectory from the mid-February highs. Both the spot and forward markets were hampered by a stronger Australian dollar.

The market drivers remain unchanged, with balance between tight supply and sluggish demand the key to medium term direction. Risk remains high along the pipeline.

The challenge for all participants is the establishment of fair forward values, but growers are faced with conflicting factors. Firstly, a price trend that clearly, with the benefit of hindsight, debunked the forward discount that has been in place over the last few years. Opposed to that are the outright price levels forward. Although historically high and representing sound margin management, it does represent fair value.

In this high-risk landscape, some insurance and certainty are important. Forward levels from the exporters will be guided by the processors and their anticipation of the degree of demand destruction bought on higher prices, coupled with embedded costs of running machinery and building stocks.

We expect next week to track in similar fashion, with any demand interest likely to be reflected in better bidding in the forwards. Volatility in this tight supply environment the likely constant.

Trade summary

19 micron April                                                2285 cents           10 tonnes

21 micron March                                            2260 cents              5 tonnes

Total 15 tonnes

Projected forward trading levels for next week

Month                                                19 micron c/kg                  21 micron c/kg

March                                                2300 cents                         2245 cents

April/May                                          2260 cents                         2210 cents

June/July                                           2230 cents                         2170 cents

Aug/Sept                                           2170 cents                         2070 cents

Oct/Dec                                             2140 cents                         2070 cents

Jan/Feb                                              2110 cents                         2030 cents


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