Risk strategy needed as wool market volatility continues

Michael Avery, Southern Aurora Markets partner, November 8, 2019

BIDDING on the wool forward market was steady at the start of the week, with trading confined to the early New Year.

The 19 micron contract traded at 1790 cents, 21 micron at 1728 cents and 28 micron at 930 cents. The spot auction disappointed with offshore demand not materialising.

All three micron price guides (MPGs) that traded this week finished below their forward traded levels. The 19 MPG micron closed spot at 1782 cents, 21 micron at 1720 cents and 28 micron at 915 cents.

Predicting the direction of the market let alone the extent of the rallies and retracements is becoming a fool’s errand. The season opened will a fall in auction prices of 30 percent during the month of August. September rallied to recovery almost half of the fall. Since then, we barely go a week without a change in direction.

The late October rally started to stall last week and the confidence that saw 19 micron trade to 1855 cents for the New Year quickly faded as the spot auction lost momentum and finished the week cheaper.

Sentiment however was reasonable with exporters seeing a stabilising, albeit slightly stronger, Australian dollar and better rhetoric from the USA/China talks as market positives.

The volatile and erratic nature of both the forwards and the spot auction highlights the importance of developing a risk strategy that incorporates setting price targets. These should be based on margin management around cost of production estimates with an eye to historical price levels and current supply and demand balance.

Valuing certainty over the fear of lost opportunity should be foremost in the current climate. To put price movements this season into perspective, the average return on a bale of 21 micron fleece wool has varied from a high of $2500 to $1750. Cost of production variations in the current drought puts more emphasis on trying to achieve above the midpoint of this range ($2125 per bale). In cents clean per kilo this is around 1700 cents for the 21 MPG. From an historic viewpoint, this is the 82nd percentile for prices over the last decade and the 67th percentile for the last five years.

What will next week bring us? Further positive news out of China on potential tariff roll backs has seen cotton futures lift overnight. Hopefully that will garner some activity for exporters over the weekend and see future New Year enquiry lift.

Indicative trading levels for next week

19 micron                           21 micron

November                                         1760 cents                         1710 cents

December                                         1740 cents                         1710 cents

January/March                                 1730 cents                         1700 cents

April/June                                          1700 cents                         1660 cents

Trade summary

January 19 micron                          1790 cents                         12 tonnes

February 21 micron                         1700/1728 cents               12 tonnes

February 28 micron                          930 cents                            5 tonnes

Total 29 tonnes


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