THE 2019/20 wool season has started with the largest retraction in prices since the cessation of the Reserve Price Scheme (RPS) in 1991.
The Eastern Market Indicator (EMI) lost 16 percent of its value, falling from a season opening level of 1754 cents to 1513 cents.
The reversal of fortunes for the market has raised comments on the inherent risk of the wool grower and calls for market intervention. If we learnt anything from the Reserve Price Scheme and resultant stockpile of 4.5 million bales it is that artificial market manipulation will end in tears.
To put the current price falls in perspective the current level of 1513c/kg clean is still in the top 25pc of prices for the last decade. The average EMI for the last 10 years is 1295c/kg and for the last five years 1494c/kg.
Wool prices peaked at 2116c/kg in August last year as a result of a perfect storm in market fundamentals. Low supply and strong demand. The drought-induced low supply — down 12.1pc to 300 million kilograms — combined with active marketing campaigns, technical innovation and general global consumer confidence saw prices double in a four-year period.
Such price pressure will always bring a degree of demand destruction. This began in the spring last year in the finer microns, but was somewhat masked in the broader qualities, with the continuing drought-induced low supply of 21 micron wool peaked in February this year at 2370/kg.
The build-up of risk factors towards the end of the wool season in July put further pressure on the market. The ongoing trade tensions between USA and China, uncertainty in Europe over Brexit, declining global growth and consumer confidence have all contributed to the decline in prices.
Where to from here?
The answer is not – “we’ve got no control over that, so you have to wear it in the wallet” — as a grower was reported to have said in the media this week.
The wool industry has risk products to enable growers to mitigate risk and smooth returns. This week, a Bombala wool grower was able to add $30,000 to his wool cheque on the maturity of his forward hedge contact.
The current Riemann Wool Forward trades only 1.5pc of the underlying wool clip of 300 million kilograms. Although forward price reports are published weekly on the Australian Wool Innovation and Sheep Central websites, and disseminated by all major brokers, penetration along the pipeline is lacking.
The need for better researched and funded extension of risk education is highlighted in the National Farmers Federation (NFF) 2030 Road Map, where it has a goal of 90pc of growers using some form of financial risk management by 2030. This will require a multi-industry approach.
This follows on the statement from AWI chief executive officer Stuart McCullough, after the volatility in the spot auction last week.
“It’s important to acknowledge there are significant macro-economic factors, beyond the control of the industry, that have influenced the recent downward trend in the EMI – this price volatility is part of the market’s cycle.
“What is also important during this period is to ensure due care is taken, to make certain wool growers are properly informed of factors influencing price and the price risk when selling, and we hope this is being exercised with vigour,” he said.
With less than 2pc of the national wool clip being hedged forward during a period of historically high prices, it is evident that the strategic message and information is not being presented in a form that engages the grower. The reasons need to be identified and content adjusted to deliver the grower the best possible outcome.
Forward markets have started this week with a more positive tone. Early Spring through to February is bid close to the close — trading at 1750 cents for 19 micron maturing in February 2020 and 1680 cents for 21 micron in September. This indicates the likelihood the spot market will look to form a short-term base. Growers should be assessing their risk into the Spring and beyond, and setting margin management targets.
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