Australian wool producers urged to hedge against likely price cliff

Southern Aurora Markets anticipates the drop to happen 'anytime from now' as soaring prices end in 'demand destruction.'

Wool producers should consider hedging against a price downturn by forward-selling a portion of their clip, a broker has said.

Prices have hit unprecedented levels this year, peaking at more than 2,300 Australian cents ($1.7) per kilogram of 21-micron wool in June. Prices dipped slightly before the three-week break in wool sales began on July 13, but are still reaching more than 2,200 cents per kilogram, according to data from Southern Aurora Markets.

Mike Avery, a partner at the firm, told Agri Investor that demand for wool is likely to fall and that his firm is anticipating the drop to come “anytime from now.”

“Generally, when prices rise at the rate they have this year, which are 35 percent up on last year, we see some degree of demand destruction,” Avery said.

“21-micron prices alone have risen 53 percent during the year. These price rises have led to cashflow difficulties along the pipeline from exporter to processors.

“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. 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 overcapacity of combing space.”

Greasy wool is the raw material shorn from sheep, before processing.

Taking this into consideration, Avery advised that growers should adopt a hedging strategy by forward-selling a portion of their clip to ensure against any potential drop in price. Available forward prices for 21-micron wool range from 2,000 to 2,200 cents per kilogram in spring and summer, and more than 1,900 cents per kilogram into the new year, he said.

“In terms of what percentage of your clip to hedge, a conservative figure would be between 20 to 30 percent 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,” Avery added.