Weaker dollar cushions wool market

Positive wool market closes down 24c


POSITIVE OUTLOOK: A softer Australian dollar cushioned falls in the wool market during the past week.

POSITIVE OUTLOOK: A softer Australian dollar cushioned falls in the wool market during the past week.

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A softer Australian dollar cushioned falls in the wool market last week.

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AUSTRALIAN growers saw the benefit of the currency markets again in the past week as the softer tone in US dollar wool prices was masked by a lower local currency.

A 3 per cent decline in the value of the Australian dollar protected local returns as reluctant indent buying orders caused prices in US dollar terms to ease and the eastern market indicator (EMI) finished down by US24c.

With medium Merino fleece, of which there was a plentiful supply leading the way down, the drop was far less noticeable than the AWEX market report showed. For local sellers the superfine wool segment performed very well indeed with gains of up to 30c.

The northern market indicator closed on 1340c, up 10c. The 17 micron indicator for the north finished on 1605c, 18 - 1580c, 19 – 1517c, 20 - 1452c, 21 - 1438c, 22- 1416c, 28- 788c, and 30 – 625c.

Apart from the medium Merino fleece sector all other wools sold to higher levels in Aussie dollar terms with skirtings, crossbreds and carding wools all finishing on a positive note. Many market participants overseas had been waiting for an easier market as a sign of normal seasonality returning to the wool market and hopefully in due course this will generate more buying activity to produce higher prices in the long run.

Demand recently in China has recently been more about filling machines in the early stages of processing rather than pull through demand from retailers. Much of the exuberance created by the new “fake-fur” product has been shelved as processors await indications from a retail level before committing to further production of this new product.

The uniform business in China continues to provide just enough work to keep the larger mills active. However, with the various government departments heeding the advice from Beijing to maintain austerity, the fabric cost is being challenged resulting in less Australian wool in preference to South American or domestic Chinese wool with a fair proportion of polyester as well.

Australian Merino is slowly pricing itself out of these bulk commodity uses but this is not necessarily a bad thing. Like the school uniform market in Korea, that was once a large destination for Australian Merino fleece, other markets that can tolerate a higher raw material price are beckoning the Merino industry. These commodity style markets will always provide a support level for the Merino fibre, but at levels generally far below what is a comfortable return for growers in this day and age.

Instead the high quality, relatively high priced garments such as the new Optim waterproof jacket being offered to all woolgrowers at a reduced price of $150 represent the future of the industry. Garments such as this one, priced at this level allow the raw material price to remain above the ever-increasing cost of production and hopefully increase even further.

At present the gross margin return for a self replacing Merino flock outperforms nearly every other mainstream agricultural enterprise in Australia, and with a sound outlook those in the younger generation entering the merino will take heart that the future finally appears sustainable rather than the doom and gloom comments perpetuated by many agricultural commentators not that long ago.

Of course part of the increase in prices has come about due to the exodus of a portion of the industry and the resultant lower supply of raw material. At current returns this exodus has largely ceased apart from some continuing adjustment at the superfine end of the clip, and favourable seasonal conditions being experienced at present should see the first increase in Merino production across Australia in 2016-17 for a number of years.

Providing that demand can be maintained or preferably increased and the top end of town keep spending, Merino’s repositioning to a luxury fibre can be consummated. Early stage demand in Europe is finally beginning to emerge after a slow start to the season as processors refill their production lines. Fashion and textile fairs across the European continent from Paris to Moscow in coming days will solidify this current demand – or alternatively prick the bubble.

However, there seems little to be frightened of on the global economic horizon at present, except perhaps a Trump victory in Late November. The currency markets are showing their usual appetite for volatility, but for Australian woolgrowers this is something that we take in our stride. The 300-point trading range of the Australian dollar last week was more positive than negative, and points towards a softer

currency in months ahead given that the resistance level in the current trading range has held categorically. Interest rates in Australia are likely to head lower if anything, conversely the US Federal Reserve will make their long awaited increase in rates in December if not September. The so called “data dump” from China last week beat expectations from analysts with industrial output growing by 6.3pc.

Retail sales also outperformed, expanding by 10.6pc from a year earlier and fixed asset investment rose by 8.1pc compared to the same period a year earlier. A fair chunk of the upside has been generated by government stimulus in China, but the government is still such a large part of their economy that it is not particularly seen as a negative way to stimulate growth. Indeed many commentators around the globe are now calling for other governments to follow suit and spend on infrastructure rather than hope that ultra low interest rates will do the job for them.

The next three-month period to years end will be critical for the global economy to establish its path to recovery, but also critical for the wool market to consolidate its new position as a luxury fibre rather than simply a volatile commodity fibre.

Bruce McLeish is Elders northern wool manager.

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