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.
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
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