Low supplies keep sector afloat but winds of change may be on the horizon in 2020-21

New year and a potential new market cycle offer hope for lacklustre wool prices

Sheepmeat
As Australia's wool industry prepares for its annual auction recess after two more selling weeks, indications are that market conditions may remain challenging in the short-term but there is potential for improvement in 2021 if a cyclical price upturn eventuates.

As Australia's wool industry prepares for its annual auction recess after two more selling weeks, indications are that market conditions may remain challenging in the short-term but there is potential for improvement in 2021 if a cyclical price upturn eventuates.

Aa

Wool industry faces continued challenging conditions in the short-term, but a cyclical upturn could occur in 2021.

Aa

Australian wool auctions wrapped-up for the financial year last week, but are not quite finished for the selling season - as there are two more sales to be held before the sector's annual three-week recess.

The break in auctions has traditionally been a time when buyers hop on a plane, or - for those who have been in the industry for a very long time - a boat, and travel back to their principal's offices and factories to review the past year and plan for the next season. That definitely won't be happening this year.

Even with an increased offering at national auctions last week, as Fremantle was back in the saddle, the wool market finished on a reasonably buoyant tone - despite what some of the market reports suggest.

The Australian Wool Exchange (AWEX) indicators fell in local currency terms by 30 cents a kilogram.

But almost half of that drop was directly attributable to currency movements, as the Australian Dollar increased by almost 1 per cent against the weaker US Dollar. So, the reduction in quote levels for the majority of customers overseas was less than 2 per cent for the week.

Some Chinese-based operators reported that: "the market is really unchanged for all good Merino types in USD, but is getting cheaper for poor types and crossbreds".

Others, such as The Schneider Group, suggested that the market had closed on a positive tone - with most descriptions tending slightly dearer on the final day of selling.

Nevertheless, 2019-20 has 'rolled-off the page' and most people in the sector are glad to see it go.

No doubt in years to come, we will be able to look back at the long-term wool price chart and put a label on this price dip as 'COVID-19' - just as we now do for the SARS outbreak, the Global Financial Crisis, the Asian Financial Crisis and other significant global economic shocks that precipitated or correlated with cyclical downturns in the wool market.

This one has been a shocker, undoubtedly exacerbated by the high 'highs' back in February 2019 and the brutal second wave of correction we have just experienced after it looked like the industry had been able to dodge the proverbial bullet when China pulled out of the virus-induced lockdown in March this year.

Having a lot of machines with no customers to export to, and a local customer base with worry on their minds, has pushed wool prices back down to 2015 levels.

But all the hard work done in the past five years by many different organisations to market the wool product, educate the consumer and establish supply chains will not go to waste.

These foundations will provide excellent building blocks for the next cyclical upswing.

The only question is when will that upswing begin, and how high will the prices go.

But having programs and relationships in place does mean the industry can take advantage of this when consumers get active again.

Most people in the trade, whether they are in China or in Europe, are saying we have 'missed the season' due to the COVID-19 pandemic shutdown of retail activity.

On occasions in the past few years there has been a late flurry of wool buying and processing activity in July-August to meet frantic Chinese retail demand, when a new product has taken-off.

But, with fairly subdued retail activity and a bit of stock lying along the processing chain available to meet any up-tick in last minute demand, there is virtually no expectation of a bounce in price in the next couple of months.

There is, however, just enough business being done that the market should remain firm (ish) over the next couple of weeks - until the recess kicks-in - allowing everyone to bunker-down and recover.

With about 20 per cent of Australia's annual wool production being held in growers' hands, or along the pipeline, the upturn in prices will initially be dampened by this overhang of stock.

But these stocks are also being viewed as a vital resource to meet demand when it does return.

With such a skinny pipeline operating at present - selling 30,000 bales a week in Australia and very little from any other source, except Chinese domestic wool - finding enough supply to meet a large volume order certainly does present a challenge for traders and processors.

The Chinese domestic clip is becoming available to the processing trade, but is shrinking in size every year.

Demand for meat production in China has been growing alongside the rising middle class and has received a huge boost with decimation of China's pork production from that 'other' flu - African Swine Fever.

Although China has more than twice the number of sheep compared to Australia, with the national flock estimated to be 160 million head or more, most of these have rather floppy ears and fat tails and the wool is not terribly soft nor luxurious.

Current estimates of Chinese domestic apparel quality wool are about 2000 tonnes, with only about 600 tonnes (or 6000 bales equivalent) of a length suitable for worsted combing.

For many in the wool industry, the auction recess can't come quick enough.

But most are thinking about 2020-21 as a recovery season in which we will hopefully get back to some form of normality, and see demand recover enough for prices to head back towards where they should be.

On the other side of COVID-19, consumers will still need to wear clothing and the retail industry will adapt to serve them when people work out how they want to purchase their clothes.

Stocks will be cleared and prices will inevitably rise.

The 89-month cycle may be the one which kicks back in for the wool industry.

This may seem like a long bow for some, but in roughly every seven and a half years in the past 50-odd years we have seen a complete price cycle take place.

This would see wool prices begin to rise next season, probably in early 2021, and trend upwards for the next couple of years.

The next six months will no doubt still be challenging. But, like after every drop in price during the past century, prices have recovered - and the highs have always been a little bit higher again.

The story Low supplies keep sector afloat but winds of change may be on the horizon in 2020-21 first appeared on Farm Online.

Aa

Comments

From the front page

Sponsored by