Wool forwards trade at discount as auction prices slump

Michael Avery, Southern Aurora Markets partner, March 11, 2020

WOOL forward contracts traded at a discount last week with one ‘black swan’ event – the previous week’s sales’ cancellation — behind us as physical auctions recommenced.

The forwards traded at a discount of 30 to 40 cents to start the week, as opinion was divided on how the auction or spot market would react to the carried over quantity from the postponed sales.

The 19 micron contract traded at 1790 cents and 21 micron traded at 1750 cents.

Wool had been seemingly immune to the pressures of the global economic uncertainty and this seemed to be the case again, as a solid start to the auction led to the forwards pushing up near to cash and trading out to May. However, the spot market peaked during Wednesday afternoon after 20,000 bales changed hands in the eastern states, with 90 percent of the offering sold. With orders filling, the prices slipped into the close, to finish 15 to 20 cheaper in Fremantle.

On Thursday, the slide continued as the price whipsaw that has dogged the market even before the emergence of the coronavirus refused to settle. In the 17 auction trading days since Christmas the key 19 and 21 micron indices have had intra-day movements of greater than 30 cents on six occasions.

The market’s direction from here is hard to gauge. Stock and commodity markets remain nervous. From an historical point of view, current prices still remain in the high percentiles, especially for the medium microns. On a ten-year scale, 19 micron is at 76pc and 21 micron is at 83pc.

From a more near-term perspective, the five-year figures show 19 micron at just over the average at 52pc, but 21 micron holding at 68pc. With the spread between 19 and 21 micron again closing to 40 cents on the spot and forward markets, a grower hedge strategy around 21 micron looks to be the logical path at the moment.

We expect some reluctance from exporters following Thursdays falls, but we may see interest return into the early autumn with follow up offshore demand. Anticipated trading levels for March, April and May will likely be around 1780 cents for 19 micron and 1740 cents for 21 micron. This discount reflects the degree of risk exporters are needing to factor in at present.

Trade summary

March 21 micron             1750/1795 cents                7 tonnes

April 19 micron                1790/1820 cents             20 tonnes

May 21 micron                  1770/1775 cents                7 tonnes

Total 34 tonnes


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