Bid for WA wool growers to boost forward selling

With their market operating on a high, WA woolgrowers could be forgiven for sidelining a forward- selling strategy.

But it is a stance that New South Wales-based Southern Aurora Markets partner Mike Avery is keen to change.

The brokerage joined Australia’s dominant exchange, Riemann’s Wool OTC Forwards, three years ago and has since sought to increase the volume of its trades, with wool just one of several commodities it handles in this way.

But in his latest weekly market wrap, Mr Avery said the challenge for all participants was the establishment of fair forward values.

“Growers are faced with conflicting factors,” he said.

“Firstly, a price trend that clearly, with the benefit of hindsight, debunked the forward discount that has been in place over the last few years.

“Opposed to that are the outright price levels forward. Although historically high and representing sound margin management, does it represent fair value?

“In this high-risk landscape, some insurance and certainty are important.”

Yet Australian growers remain reluctant to adopt wool forwards.

“If you look at the size of the Australian wool clip in physical terms and the proportion that gets hedged, you would be lucky to get 2 to 3 per cent of the clip in any forward contract, which is really small,” Mecardo analyst Matt Dalgleish said.

Hindering take-up has been the fact that forward prices, which for 19 microns list up to January 2021, are often at a discount to the spot market.

“There has been a perception over the past year or so of where supply has been heading, broadly, and the level of demand, so there has been some comfort around prices maintaining their levels and potentially going up over this period,” Mr Dalgleish said.

With prices remaining at historically high levels and supply for Merino wool tight, National Council of Wool Selling Brokers of Australia executive director Chris Wilcox said the wool market was in an extraordinary situation.

However, he said recent sentiment regarding the global economy could affect that outlook. “Concerns have been expressed in equity markets around the world about what might happen to the world economy over the next 12 months to two years, and it’s all on the downside,” he said.

“My belief is the world economy has been one of the drivers for where wool prices have got to over the last two years, and they have been there for an extended period of time, so given that prospect of weakening across the board in terms of world economy, that leads me to think there is some scope for some downside.”