WOOL forward markets traded strongly last week as the spot auction market had another strong sale series in Sydney and Melbourne.

However, trading was sporadic as buyers and sellers grappled with assessment of fair value.

Exporters are facing a chorus of discontent from processors unable to sell tops and yarns within dollars of replacement. Any forward sales uncovered have proved costly for the exporter, but the alternative of taking stock brings incumbent risk and financing pressures.

Against this backdrop is the current unrelenting grind upwards of a market faced with tight spot supply and the pressure to keep machinery running.

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The dilemma facing growers today is trying to balance the market signals. While the market has risen constantly for almost two years, the forwards have remained in discount.

With the benefit of hindsight, forward hedging has not delivered positive outcomes. The question now for sellers is not whether those signals are still inaccurate, but whether the risk and the value of certain price outcomes for part of their production is too high to ignore.

The trade levels achieved this week probably go some of the way to answering that question. The 21 micron index trading at 2100 cents-plus in the early spring, 2000 cents in December and 1970 cents in February 2019 delivers strong guaranteed margins.

We expect the tight supply conditions to hold the market through to the end of the season, but these price levels cash flow constraints and increased demand destruction could deliver high volatility.

Anticipated levels next week

Month                                                19 micron                           21 micron

June                                                    2330 cents                         2300 cents

July                                                     2300 cents                         2280 cents

Aug                                                     2270 cents                         2240 cents

Sept                                                    2200 cents                         2170 cents

Oct                                                      2170 cents                         2140 cents

Nov                                                     2100 cents                         2070 cents

Dec                                                     2080 cents                         2040 cents

Trade summary

August                                 21 micron            2240 cents                                       2.5 tonnes

September                         19 micron put option 2050cts strike at 40 cents  2.5 tonnes

September                         19 micron put option 2025cts strike at 40 cents  5 tonnes

September                         21 micron            2085/2110 cents                              6.5 tonnes

September                         23 micron            2030 cents                                        2 tonnes

October                              18 micron            2355 cents                                        2 tonnes

October                              19 micron            2155 cents                                       2.5 tonnes

October                              21 micron            2050/2140 cents                           20 tonnes

November                          21 micron            2030/2050 cents                             9.5 tonnes

November                          28 micron              900 cents                                        4 tonnes

December                          21 micron             2000/2050 cents                            9.5 tonnes

January 2019                     18 micron             2310 cents                                      3 tonnes

January 2019                     21 micron             1980/2000 cents                            6 tonnes

February 2019                   19 micron             2055 cents                                      2.5 tonnes

February 2019                   21 micron             1970 cents                                     10 tonnes

March 2019                       18 micron              2255 cents                                        2.5 tonnes

May 2019                           18 micron             2255 cents                                        2.5 tonnes

May 2019                           19 micron             2000 cents                                        2 tonnes

Total 95 tons