Wool on winning run with modern buyers

Warning of ‘market instability’ following highs

WE’VE experienced wool prices higher than ever before, but the end might be in sight as prices begin to fall.

An industry expert has warned there could be “trouble downstream” as the rapid price increase causes market instability.

“The market’s been on the rise for the best part of two years but the last two months have been really driven by a short supply, the demand has been steady,” Southern Aurora Markets wool specialist Mike Avery said.

“What happens is you get a disconnect between what the market is doing and what’s happening down stream.

“The price level that wool tops have been selling at the last few weeks is $2-3 below the cost of replacement, what it would cost to buy the wool and make the top.

“You do get some type of market destruction when you get these price squeezes.”

Mr Avery said he believed prices would start to decrease.

“We’ve gone a bit ahead of ourselves and I think we’re going to see some consolidation in the market,” he said.

“We’ve seen it come back about 80c so far.

“If we go back just a year it’s gone from $15.50 to $23. So a 53 per cent rise is a lot.”

Mr Avery recommended a hedging strategy based on forward selling a portion of their wool clip at the current high prices to 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,” he said.

“Hedging is a price risk management strategy designed to minimise exposure to market risk associated with changes in supply, demand and price.”

Mr Avery explained that locking in a percentage of your clip 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 – was a good option for managing cost of production and to ensure margins.

“If we talk about 21 micron last December it was $16.60. A grower has watched the market go up and it’s now at $22. He’s still got six months until his next shearing and he doesn’t want to see the prices drop again,” Mr Avery said.

“Lets say he’s predicting he’ll have 100 bales.

“He might hedge 50 of those bales at the best forward price he has at the moment. So he sells the index for $21.

“So he can guarantee for half of his wool he’s going to get $21.

“But for the rest of his wool he won’t know what the market will be like.

“But he can guarantee he’s going to get a higher price for 50 per cent of his wool.”

Mr Avery said one of the most important arguments for hedging was de-risking agricultural business for people who supply the funding for it.

“Funding after the recent banking inquires will be a bit more difficult,” he said.

“So if farmers can take some of that risk away from their business then banking will become a bit easier.”

Mr Avery said for the benefit of the industry, wool prices needed to come back a bit to be sustainable.

“This sort of rise doesn’t do anybody any good,” he said.

“It was good for the few farmers that were selling in that sort of two-month period. But I’d rather see a more stable market.

“The steady rise over the past two years has been fine, but when it goes up in a straight line the process goes out of whack.

“A higher benchmark is acceptable to processors but not the sort of volatility we’ve had over the last few months.

“It could fall back to $20, but if I’d mentioned $20 to a grower a year ago they would have said ‘sign me up’, because it covers well over their operational costs.”

❝ You do get some type of market destruction when you get these price squeezes.

— Mike Avery