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.
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.
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