We start the new year from the best base that the wool market seen in most of our working lives. With 18.0 microns at 2300, 18.5 at 2200, 19.0 close to 2100 and 21.0 at 1750 all merino sellers got their Christmas presents early.
What might 2018 hold and what strategies should we consider to manage the risk?
Summary of what do we know (both measured and anecdotal)
Auction prices – Near record prices over all merino qualities.
Auction Clearance 94.4%
Auction First hand offered wool up 6.5%
Forecast production 345 mkg greasy Up 1.4% yoy
AWTA testing 183 mkg up 1.4% yoy (December -15%)
Exports July to Oct up 10%
Wool Brokers/handlers reporting
-historically low instore stocks
-low test to sale and sale to export.
Wool stock to use ratio at a cyclic low
AUD/USD 78.3 – up from 76 cents pre-Xmas
Cotton 78usc/lb approx. 2.20aud/kg
Cotton stock to use at around 75%
Wool/Cotton price ratio nearing 8/1
Cotton/Polyester ratio 1.7/1
Certainly, a lot to digest and to gauge the impact on the market.
Record prices have been well reported. Peaking just before Christmas all merino qualities are in there 99th percentile. The impact of rising in price of over the last 12 months (30% year on year) on demand will be the key to this year’s outcomes. High clearance rates (94.4%) and solid export numbers suggest no stock build up domestically.
Exporters report limited stock in early stages but some build as we move through the pipeline. Overall exports remain in positive territory. The traders are awaiting the November export numbers to confirm the strong pull through of the first four months. Concerns have surfaced that the sustained higher levels have processors looking to increase blend ratios where substitution is possible. Polyester prices have lifted marginally in 2017 but off a low base. Cotton has lifted in price 6% in 2017. With the price heading towards AUD500 per bale delivering a solid return to Australian growers the Wool to Cotton ratio remains at an historical high of 8/1. World cotton stocks remain high (76% stock to use) but that ratio is on track to fall for the fourth consecutive year from a high in 2014 of 102%.
If competitive fibres continue to underperform in relation to wool then substitution will present opportunity for processors to reduce first cost pressure. It would be normal to see some demand erosion with elevated prices. New demand creation has been the driver of the market. Whether it can balance the likely resistance at these levels are to be seen.
Concerns on supply have also been a factor in the volatile nature of the market. Wool brokers and handlers confirm that held stocks are at a low level and wool is moving through the at a rapid pace. This is backed up by the statistics showing both significant reduction in both average storage time in shed and testing to auction. AWTA testing figures showed testing numbers well ahead of schedule up until October. That trend has reversed over November and December. We are now only 1.4% ahead on schedule which is in line with Wool Forecast Committees estimate for 2017/18. This points to a shortfall in early January sales but normalising as we move forward into the autumn.
Finance and the AUD/USD ratio are likely to have an influence on the market especially in the short term. The high price of wool is making funding a challenge all along the pipeline. Exporters are expressing concerns that the lift in the AUD from 0.757 when the market peaked prior to Christmas to 0.785 today has hampered new business over the break and likely to follow into the first week of auctions. The fate of the Aussie Dollar for the rest of the year is mixed to say the least. Of the 9 major banks surveyed on the forecast 3 have the dollar stronger by year end, 4 weaker and 2 unchanged. The range 0.67 to 0.85.
So, what does this mean for the wool market and how can we manage the volatility.
It is anticipated that the market will initially open on a cautious note. Opinion is divided on the extent of the pull back. On 21.0 microns, the market has sustained a rally from 1540 in late October to peak at 1758 and close at 1742. A pull back to 1640 would still be in the 95 percentile of prices for the last two years. A complete retraction to the October level of 1540 would place it at the 80th percentile.
Forward markets have been notably quiet over the recess. Opening levels on 21.0 microns
FEB 1670 1705
MARCH 1670 1705
APRIL 1640 1670
We anticipate trading in the early months around the mid points.