Forward wool market focusses on medium Merino wool shortage

Michael Avery, Southern Aurora Markets, June 15, 2018

FORWARD wool market trading this week reflected the strength of the medium micron sector, with two thirds of the week’s trades focused on 21 and 22 microns.

The balance of the trades in the 18-19 micron band delivered strong outright prices, as exporters looked for value against the spot market values.

Exporters remain wary and bids for spring and beyond reflected the inferred risk of better supply and price fatigue that processors are experiencing. Trades on 21 microns into the New Year delivered hedge levels of 1930 cents, which were higher than the then record prices received at auction. The March 2018 auction average for the 21 micron Micron Price Guide was 1892 cents and for April 1925 cents.

The spot market continues to be driven by lack of supply in the medium wools. This is graphically illustrated by the closing quotes from AWEX: 19 micron 2288 cents, 19.5 micron 2281 cents, 20 micron 2278 cents and 21 micron 2280 cents.

Tight supply is expected to dominate market direction for the remainder of the current season and should deliver strong outright levels on forwards. The risk level of a correction is growing in the minds of processors and exporters. Inventory costs have risen 68 percent in 18 months.

The timing and extent of the correction is difficult to predict, making strategic hedge decisions a challenge for buyers and sellers. This is reflected in the pricing of options, with few sellers wanting to take on the risk.

Hedging at the current forward levels would appear to be an easy decision. A value of 2000 cents-plus for 21 micron into the spring and 1930 cents into next autumn is delivering a guaranteed return of between $2400 and $2500 per bale. With the aid of hindsight, hedging forward over the last 18 months has delivered negative results. In essence, this is no different than being disappointed in taking car insurance and not having an accident. Both buyer and seller need to find a fair value forward level to deliver a degree of certainty. The value of certainty is more important than the fear of lost opportunity.

Anticipated levels next week

Month                                                19 micron                           21 micron

June                                                    2240 cents                         2240 cents

July                                                     2210 cents                          2200 cents

Aug                                                     2120 cents                          2080 cents

Sept                                                    2100 cents                          2050 cents

Oct                                                      2100 cents                          2030 cents

Nov                                                     2080 cents                          2000 cents

Dec                                                     2040 cents                          1980 cents

Trade summary

July                                      21 micron             2200 cents                        2 tonnes

September                         19 micron            2100 cents                       2.5 tonnes

September                         21 micron             2005/2050 cents              6.5 tonnes

September                         22 micron            2050 cents                        5 tonnes

October                              18 micron             2295 cents                        2 tonnes

October                              19 micron            2110 cents                        2.5 tonnes

October                              21 micron            2005/2010 cents          14.5 tonnes

November                          19 micron            2100 cents                        2 tonnes

November                          21 micron            1950/2005 cents               6.5 tonnes

December                          18 micron            2255 cents                         2.5 tonnes

December                          19 micron            2050 cents                         2 tonnes

January 2019                     18 micron            2255 cents                         12 tonnes

March 2019                       21 micron            1930 cents                         10 tonnes

April 2019                           21 micron            1930 cents                         10 tonnes

Total 80.5 tonnes



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