How best to sell wool in uncertain times

How to sell wool in uncertain times

Sheepmeat
Southern Aurora Markets partner Mike Avery specialises in brokering forward derivative contracts.

Southern Aurora Markets partner Mike Avery specialises in brokering forward derivative contracts.

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At a time when uncertainty is plaguing the wool industry, there's one way wool growers can get ahead - forward selling.

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At a time when uncertainty is plaguing the wool industry, there's one way wool growers can get ahead - forward selling.

That's according to Southern Aurora Markets partner Mike Avery, who specialises in brokering forward derivative contracts.

Mr Avery said wool growers could hedge part of their clip and get some certainty over price.

"Wool growers can put an offer through their broker into the market saying they would like to hedge their 21-micron clip at 1400 cents a kilogram to sell in December and a processor or exporter will line that up with their orders and say 'yep, we'll buy that at that price'," he said.

"Then it's contracted and that's sent out to the wool broker and the exporter confirming it."

He said come December, the wool grower would still sell their clip through the auction process, and would then "get the quality premiums and discounts that the wool deserves".

But when's the best time to hedge?

"It's a little bit like asking 'when's the best time to plant a tree?', the best time would be 20 years ago but the second best time would be today," he said.

Right now, with uncertainty ahead, he said any short-term price fluctuations to the upside should be viewed as a chance to place some hedges.

"Yes, the price is falling and hedge prices are lower, but we're looking at managing margin," he said.

"No one's trying to guess the market, if there's anything we've learned in the last six months it's that you can't predict the future, but the important thing is putting value on certainty and knowing that in six months' time, for a portion of your clip, you'll get a certain price."

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Mr Avery said he had a client who hedged six times across the year.

"He had prices varying from 2050c/kg down to 1400c/kg, and his average was about 1700c/kg," he said.

"Of course, in hindsight he should have hedged everything at 2050c/kg, but that's hindsight.

"He was very smart to get a degree of certainty over the period of time."

He said some people hedged against their cost of production.

"Let's say it costs $10 a kilogram to produce your wool, well you might then hedge at 1200c/kg or 1300c/kg, to ensure you make a profit," he said.

Mr Avery said agriculture was one of the most risky industries you could be involved in, with so many variables that were out of your control, so it was crucial to look at your risk management.

"There are all sorts of strategies, but the principal is to put some degree of certainty into it," he said.

If forward selling isn't your thing, Michell Direct Wool wool market specialist Marc Truman had some advice for wool growers.

"Wool prices are falling at the moment and trying to find a base to trade at," Mr Truman said.

"I don't think it's found the bottom of the bucket yet.

Michell Direct Wool wool market specialist Marc Truman says if wool growers can hold onto their wool, they should.

Michell Direct Wool wool market specialist Marc Truman says if wool growers can hold onto their wool, they should.

"If you can hang on, hang onto it, but if you need to sell it, take whatever you can get."

He said you may need to hang on for a couple of months.

"I think in a couple of months' time it's going to sort itself out," he said.

"Everyone will at least know what the trading base is."

Mr Truman said the uncertain terms were a result of more than just coronavirus.

"We've been struggling since July last year because wool had been at record prices and was bought by manufacturers and made into goods and because it was so expensive to make, the end product became very expensive too," he said.

"A lot of people held back because it was too dear."

He said there was a fair bit of backlash at the end of the supply chain at that time, and therefore those record prices "probably won't be seen again".

He said we were lucky to be coming out of drought at the moment because sheep numbers were down and that meant wool supplies were too.

"We would have had too much wool otherwise," he said.

The story How best to sell wool in uncertain times first appeared on Farm Online.

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