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Global and domestic state of the wool industry

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In its monthly report AWI has examined the global and domestic state of the wool industry in light of the recent World Merino Congress in Montevideo, Uruguay, coupled with record prices at Australian wool sales and a recent Australian wool production forecast, and takes stock of supply, demand and what may lie ahead.

More than 400 delegates from Australia, New Zealand, South Africa, Uruguay, Argentina, Lesotho, Russia, United States and Portugal met this month at the World Merino Conference in Montevideo, Uruguay. A very upbeat tone was present given the historically-high prices for Merino wool being enjoyed by woolgrowers and trade participants from around the globe. From those presenting from the main Merino wool producing countries there was a similar underlying theme, namely an inability to significantly lift production.

Despite trading conditions being favourable and Merino woolgrowers enjoying well-deserved returns, all woolgrowers who presented on behalf of their domestic industries stated that wool production had serious limitations for growth. In Australia, the producer of more than 80% of the world fine apparel wool, production growth is limited by the lack of Merino ewes, the high lamb and mutton price, poor seasons, wild dog predation, land committed to cropping and in some cases a lack of infrastructure and even expertise amongst prospective woolgrowers. In New Zealand, land suitable for Merino woolgrowing is limited partly due to similar factors in Australia but also the drive to preserve some high-country areas for conservation.

In South Africa, political changes, predation and indeed the development of some areas to mining is impacting growth potential and in Argentina major predation by foxes and pumas are limiting weaning rates to less than 70% for many Merino producers. Wool-growing regions of Patagonia, Argentina have only recently recovered from significant volcanic activity in Chile so there is a myriad of reasons why the global supply of wool is not about to lift significantly, despite the relatively favourable market.

Australian shorn wool production is forecast to drop by 0.6pc in 2017-18 to 338 million kilograms. Pleasing to hear at the congress in addresses by keynote speakers was the affirmation of a long-held belief that demand is the predominant factor at play and is the key driver in the market. Supply simply can’t keep up with the rising demand of the past 8 years or so. In fact, the comment was made from the lectern that “supply wins the battle but demand wins the war”. Examining wool volume vs price over the last 5-6 years is a good case in point.

The wool price as represented by the EMI has traditionally traded at three to four times the price of cotton as represented by the Cotlook A index and this can be seen above when examining the first 10 years of the graph when comparing the white line of the EMI relative to the orange line of the Cotlook A index. In fact, all fibres other than wool: cotton, acrylic, nylon and polyester, have traded in a band of prices that appear rather flat relative to wool since 2001. The exception is the price spike in late 2010, early 2011 that effected both wool and cotton. One very clear trend when comparing wool to these man-made and commodity fibres is the relative price ratios beyond around 2013-14. Over the past 4-5 years the EMI has clearly pulled away from these fibres, so much so that the current market shows that wool:cotton ratio is currently closer to 7:1 rather than the traditional 3-4:1. It is clear that wool is now perceived as a more valuable fibre relative to cotton, nylon, polyester, acrylic and nylon.

The Cotlook A index monthly average is around $2.03 US/kg and the EMI will end April at 13.98 US/kg, giving a wool:cotton ratio of just under 7:1. In Australian dollar terms the ratio is obviously much larger with the EMI finishing April at a record week-ending high of 1846 Ac/kg.

The bottom line is that the world’s consumers, those who ultimately set the price for wool at the cash register, are willing to pay a premium for Merino wool as a renewable but rare natural fibre and unless consumers know about wool and its superior natural benefits, they will not demand it let alone pay a significant premium for it over these man-made and cellulosic fibres. Given what we know domestically about constrained wool production and what we have learnt in Uruguay about global Merino wool production, supply cannot lift significantly. If demand can stay relatively stable into the short term then so can prices.

Source: AWI

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