Forward wool markets hit by China-US trade tensions

Michael Avery, Southern Aurora Markets partner, May 24, 2019

IF the weekends election results taught us anything, it is that even with all the predictive tools, surveys and polling it is difficult to foresee the future.

Most wool market pundits saw the easing tendencies of the historically high prices of the early autumn to continue through to the end of the season. It’s a case of demand destruction caused by high prices matched by drought-induced tight supply. This played out for three months with the Eastern Market Indicator (EMI) losing 4pc.

The escalating trade tensions between China and the USA has dampened confidence across most commodities. This has significantly impacted the spot wool auctions, with the EMI falling 120 cents (6.5pc) in the last two weeks. Forward markets have also been affected.

The 2020 and 2021 bidding was lighter this week, with trades in 19 micron wool going through at 2070 cents, having peaked at 2155 cents a fortnight ago. These lower hedging levels still represent the 70th percentile of prices for the last four years.

The current volatility in the market should see exporters looking get cover into the spring to motivate offshore sales and alleviate risk. Grower response will be critical to restoring confidence along the pipeline. Growers need to set realistic price goals that value certainty and protect margins. This is no easy task in this current environment, with production costs increasing and forward prices unstable.

We expect to see some forward demand to reappear around 50 cents below current spot levels for the spring. This would put 19 microns around 2050-2080 cents. The forward market is factoring in a wider spread to develop between 19 and 21 micron as selection increases on the broader qualities. This would put early spring levels on 21 micron at around 2000 cents.

The graph above highlights the movement in the 19 Micron Price Guide over the last decade. The significant shift in prices over the last four years has delivered the opportunity to reset targets and hedge strategies. A conservative risk-averse strategy would look at an entry level around the 60th percentile. This level sits around 1960 cents. Even with the recent test and potential break of the upward channel forward trades are still likely within the 60th to 70th band. The forward curve still shows a discount bias and higher perceived risk for the buyer into 2020. This would indicate that growers should be looking higher targets for coming spring.

Projected forward trading levels for next week

Month                                 19 micron                           21 micron                           28 micron

May                                     2120 cents                         2090 cents                         1050 cents

June                                     2100 cents                         2070 cents                         1000 cents

July                                      2100 cents                         1980 cents                         1000 cents

Aug/Sept                            2100 cents                         1960 cents                         1050 cents

Oct/Dec                              2050 cents                         1950 cents                           910 cents

Jan/June 2020                   2000 cents                         1900 cents                           880 cents

July/Dec 2020                    2000 cents                         1900 cents                          850 cents

Trade summary

19 micron June 2019                                      2175 cents           3 tonnes

Jan 2020                                                           2070 cents           5 tonnes

Feb 2020                                                           2070 cents           5 tonnes

21 micron August 2019                                 2110 cents           5 tonnes

Total 18 tonnes


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