LIGHT trading in the wool forward markets this week reflected the uncertainty that surrounds the industry landscape on all levels, but the balance of supply and demand will ultimately decide the outcome.

Demand creation and steady supply has seen the spot market rise to set new highs over the last two years, but the ability of the pipeline to sustain these rises continues to be questioned.

At some point high prices will cause demand destruction, shifting the balance in the market. The forward markets have wrongly indicated this for much of the last two years, trading at a discount to the spot market and anticipating a price driven correction.

The current retraction in the spot market of around 100 cents is in line with the previous seven pull-backs over this two-year period. The questions are does the market need to come back further to meet the expectations of downstream processors and consumers, or will tight supply due to the sustained drought conditions halt the downward trend?

Forward market levels for October and November indicate exporters’ willingness to cover some of their risk at close to spot levels. The 21 micron index is bid at 2150c/kg, about 1 percent under the spot market. The 19 micron index for the same period at 2260 cents is about 4pc under cash.

Light volume on the sell side from growers can be partly attributed to fatigue bought about by the significant discounts the forwards have delivered over the last two years. The moderate discounts and the outright level should now be the focus. Valuing price certainty for part of the next clip, particularly during these tough times, should be a strategy worth considering.

Trade summary

October                              19 micron            2320 cents           2 tonnes

November                          21 micron            2165 cents           5 tonnes

Projected forward trading levels for next week

Month                                 19 micron c/kg                  21 micron c/kg

Oct                                       2280 cents                         2150 cents

Nov                                      2260 cents                         2150 cents

Dec                                      2200 cents                         2100 cents

Jan                                       2170 cents                         2100 cents

Feb                                       2140 cents                         2100 cents

May/June                           2120 cents                         2020 cents

July/Dec                              2100 cents                         2000 cents

Source: Southern Aurora Markets.