AUSTRALIAN wool growers have been urged to sell forward a portion of their clip to manage risk ahead of any slowing of demand.
With wool prices still at record highs despite last week’s drop, agricultural commodities risk management specialist Southern Aurora Markets is urging growers to consider hedging by forward selling a portion of their clip as a buffer against a likely price downturn driven by declining demand.
Southern Aurora Markets partner – wool, Mike Avery, said that the Australian wool market was in uncharted territory.
Even with supply forecast to decline another 1.7 percent in 2018/19, the record prices currently being enjoyed by the industry are unlikely to last, SAW said in a statement today.
“Generally, when prices rise at the rate they have this year, which are 35pc up on last year, we see some degree of demand destruction.
“21-micron prices alone have risen 53pc during the year,” Mr Avery said.
“These price rises have led to cash flow difficulties along the pipeline from exporter to processors.
“Funding pressures and fluctuating currency movements have increased the “just in time” mentality of the market and are likely to lead to more of the volatility that came into play last week,” he said.
“Processors have exhausted any moderately-priced stock and are unable to pass the full extent of price rises down the chain.
“This will lead to changes in blend ratios and substitution,” Mr Avery said.
“The extent of the changes will be dictated by the nature of the yarn or garment and its end use.
“Against this negative impact are the facts that in China, the major wool import country, there remains low greasy stock and an over capacity of combing space.”
Forward selling is a hedge against price volatility
Mr Avery said adopting a hedging strategy based on forward selling a portion of their wool clip at the current high prices would assist growers in providing insurance against likely price volatility in the future.
“Last week’s price drop has not been felt as severely on the forward markets and highlights the value of considering hedging to manage volatility.
“Hedging is a price risk management strategy designed to minimise exposure to market risk associated with changes in supply, demand and price,” he said.
“It should be considered as a long-term margin management tool and is about valuing certainty over the fear of lost opportunity.
“Locking in a percentage of your clip now at the current spot prices and available forward prices – 2000 to 2200 cents a kilogram for 21 micron wool in spring and summer and over 1900c/kg into the New Year – is a compelling argument for managing cost of production and to ensure margins,” Mr Avery said.
“In terms of what percentage of your clip to hedge, a conservative figure would be between 20 to 30pc to cover the risk of a significant retraction in price.
“De-risking the business also has a positive impact on the cost and ability to obtain funding.”
Source: Southern Aurora Markets.