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
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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