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.
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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