Forward wool-trading flurry as spot auction market falls again

Michael Avery, Southern Aurora Markets, November 12, 2018

DESPITE a flurry of forward wool trading last week, market volatility indicates it’s never too late to manage price risk.

Last week was a highly volatile week that saw the auction suffer significant losses on Wednesday and try to hold its own to the close Thursday, but still struggled to find support.

The forward markets traded briskly as some traders moved to the sell side, when the spot auction broke through anticipated support levels. While growers may have missed the opportunity to lock in forward contracts at peak prices, the ongoing uncertainty demonstrates the importance of adopting a hedging strategy to manage price risk – it’s not about trying to pick the top but about managing margin.

The 19 micron indicator dropped 121 cents a kilogram last week. Some growers participated into the spring of 2019 with significant volume (95 tonnes) traded October to December, but the majority was trade selling.

Trades on the 19.0 micron index went through at 1980c/kg. Although discounted 120 cents to the closing cash price (2108c/kg), it still equates to the 75 percentile of the last four years.

End users have been unable to pass on the current levels to consumers and have seen some short demand destruction. Their willingness to price well above the long term (eight years) average of 1470c/kg and the medium term (four years) of 1695c/kg indicates that demand creation of the recent years, coupled with supply constraints, should see the market correct above this medium-term average. Unfortunately, markets have a tendency to over-correct, so volatility will be common place.

It was very pleasing to see bidding out one and two years by the end users. Current bidding in the Spring of 2019 for 19 microns is at 1930c/kg (down from 1980 traded this week) and Spring 2020 at 1880c/kg. This gives growers a chance to obtain price stability for one and two-year forwards well above cost and the average of what has been, in a price perspective, a rewarding and sustained uptrend.

Volumes remained light pre-Christmas with both buyers and sellers unsure of where support will be found. The basis premium for fine wool continues to tighten with 19 to 21 micron closing from 97c/kg to 54c/kg this week. Bidding on the 21 micron contract is at 2000c/kg for November and 1990c/kg for December. At 50 cents under cash, it indicates that exporters still see some downside — the market has lost 200 cents in the last three weeks — but tight supply may slow the down trend. Providing the opportunity for growers to lock in a portion of the production is an important outcome.

Trade summary

Month                                 Micron                                Price c/kg                           Tonnage

February                             19 micron                           2070 cents                         5 tonnes

May                                     19 micron                           1990 cents                         5 tonnes

October                              19 micron                           1980 cents                         15 tonnes

November 2019                19 micron                           1980 cents                         40 tonnes

December 2019                19 micron                           1970/1980 cents               40 tonnes

November 2018               21 micron                           2030/2080 cents               15 tonnes

January                               21 micron                           1980 cents                          5 tonnes

February                             21 micron                           1980/2050 cents               10 tonnes

March                                 21 micron                           1980 cents                           5 tonnes

May                                     21 micron                           1910 cents                           5 tonnes

October                              21 micron                           1888/1925 cents               10 tonnes

February                             28 micron                             740 cents                             5 tonnes

Total 160 tonnes

Projected forward trading levels for next week

Month                                 19 micron c/kg                                 21 micron c/kg

Nov                                      2070                                                   2000

Dec                                      2040                                                   1970

Jan                                       2020                                                   1950

Feb                                       2010                                                   1940

Mar/June                            1980                                                   1910

July/Dec                              1930                                                   1850


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