Wool demand uncertainty points to forward marketing option

Michael Avery, Southern Aurora Markets, October 29, 2018

ONGOING wool auction market uncertainty is heralding the necessity to look to forward marketing as a strategy to manage the current price ‘retracement’ risk.

Uncertainty has driven the spot market for the key 21 micron price guide down 93 cents a kilogram to 2158c/kg over the last three trading days and 196c/kg off its peak of 2354c/kg in August.

Forwards traded early in the week at 2185c/kg for November to a low of 2120c/kg, before rallying to trade at 2150c/kg. The depth of the current retracement is the difficult thing to predict and highlights the need for growers to have a strategy to manage this risk.

The current rally has now run almost three years — roughly 300 trading days. Since 1995, we have had only two other rallies of this length. These occurred between 1999 and 2002 (351 trading days) and 2008 to 2011 (286 trading days).

We currently sit right in between these two numbers. Options are divided; will we see a further retracement similar to the price action we saw in June 2015 when we saw the market give back 24 percent or nearly 300c/kg (1505c/kg to 1214c/kg) before embarking on the current bull run? This would see the retracement continue through to December. Conversely, has the market done enough work and will we rally sooner and possibly look to a new peak? More important to consider is has this bull rally ended and has a longer deeper down trend commenced?

History will show that these long-term rallies have an end-point. When this current rally will finish is impossible to predict, but the current drought and tight supply could extend the timeline. As mentioned in our previous report, the balance of supply and demand is key.

Tight supply and demand creation for wool into the non-traditional sectors of casual, sports and outdoor wear has been the driver of the rally that has taken prices to unchartered territory. The current retraction has been triggered by concerns that the high prices will cause demand destruction in the more traditional apparel sectors. This coupled with the general malaise in our largest processing market, China, brought on by the recent decline in global share prices and the escalating tariff war, has seen short term demand stall and purchasing decisions delayed.

The lack of participation in the forward markets is also adding to the spot volatility. All sectors of the pipeline need to address this to deliver some degree of certainty and margin management. A rally off current levels should provide growers with opportunities to hedge into the Christmas period at strong levels. On medium wools (21 micron), forward prices would push towards 2120c/kg to 2150c/kg for December, 2050c/kg to 2100c/kg for February and 2020c/kg to 2040c/kg for May and June. This would represent levels in the 80 to 85 percentile range of prices for the last two years.

Trade summary

Month                                                Micron                 Price c/kg                            Tonnage

November                                         19 micron            2280 cents                         2.5 tonnes

November                                         21 micron             2120/2185 cents              20 tonnes

April 2019                                          21 micron             2050 cents                        10 tonnes

October 2019                                   21 micron            2000 cents                          7 tonnes

Total 39.5 tonnes

Projected forward trading levels for next week

Month                                 19 micron c/kg                   21 micron c/kg

October                              2240 cents                         2130 cents

November                          2200 cents                          2130 cents

December                          2170 cents                          2100 cents

January                               2170 cents                          2080 cents

February                             2150 cents                          2070 cents

Mar/June                            2120 cents                          2050 cents

July/Dec                              2070 cents                          2000 cents

Source: Southern Aurora Markets.


Your email address will not be published. Required fields are marked *

Your comment will not appear until it has been moderated.
Contributions that contravene our Comments Policy will not be published.


Get Sheep Central's news headlines emailed to you -