Forward wool markets stagnant in higher risk landscape

Michael Avery, Southern Aurora Markets partner, January 25, 2019

FORWARD wool markets were stagnant this week, with very little interest coming from the grower side.

Traders populated both sides of the market as they looked to balance positions. Demand signals remain poor, with exporters unable to sell at levels the tight supply conditions demand.

The spot auction remained firm across all Merino types, but fine crossbreds had mixed results. The only trading was in the late autumn/early winter, with May and June executed at 2165 cents and 2160 cents respectively. Some improved bidding has come through in the spring with 19 micron bid to 2140 cents and 21 micron at 2010. Growers are justifiable cautious at these levels having to deal with the ongoing drought and, with the benefit of hindsight, the fact that forward discounts were unwarranted.

Unfortunately, we continue to be in a higher risk landscape. Macro-economic signals suggest a drop in commodity prices. Hopefully for wool this will be mitigated slightly by historically low supply and an Australian-US dollar exchange rate that at best will hold in the low 70s.

With our largest processor, China, reducing imports and consumer confidence low, the outlook is for higher volatility with a weakening bias.

The current heat wave conditions and production issues are the priority, but margin management on the clip that is coming should not be ignored. Setting historically high target will guarantee margins and spread the risk along the pipeline.

Based on the last two years’ data, the spot auction market is around 85 percentile level, which puts 19 micron at 2292 cents, 21 micron at 2220 cents and 28 micron at 946 cents. These could be good starting points to mitigate risk in the short term window. Medium and longer term hedging would likely look to target more to the 70 to 80 percentile range, depending on individual situation and appetite to risk.

Jan 2017/2019                  19 micron            21 micron            28 micron

85 percentile                     2292 cents          2220 cents          946 cents

80 percentile                     2270 cents          2170 cents          915 cents

75 percentile                     2210 cents          2130 cents          890 cents

70 percentile                     2155 cents          2030 cents          860 cents

Trade summary

21 micron            May       2165 cents                         3 tonnes

21 micron            June       2150/2160 cents            15 tonnes

Total 18 tonnes

Projected forward trading levels for next week

Month                                 19 micron c/kg                  21 micron c/kg

Jan                                       2300 cents                         2230 cents

Feb                                       2250 cents                         2150 cents

March                                 2230 cents                         2150 cents

Apr/May                             2210 cents                         2145 cents

June/July                            2180 cents                         2150 cents

Aug/Sept                            2140 cents                         2040 cents

Oct/Dec                              2140 cents                         2040 cents

Jan/Feb                               2060 cents                         1980 cents



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