Wool held back in flat market

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Bob GarnantThe West Australian

The lack of a US interest rate rise and a downgrading of American growth forecasts played havoc on the wool market last week.

Australian Wool Industries Secretariat executive director Peter Morgan said the Eastern Market Indicator finished 1c/kg higher in a continued pattern of recent weeks.

"The EMI has now ranged between 1085c and 1101c/kg clean for the last seven sales," he said.

"The US exchange rate finished 1.28c higher to close at 77.32c on Thursday.

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"The rise was driven almost entirely by a rise of 1.11c on Thursday after US Federal Reserve announced it had no intention to increase interest rates."

The Australian Wool Exchange said the 43,442-bale offering brought a fairly flat market that closed at 1093c/kg clean.

"Most of the Merino sector gained a few cents on the opening day before reversing direction on Thursday and closing largely unchanged for the week," an AWEX spokesman said.

"The only exception was in the broader categories, which lost ground over both days.

"While 21 to 23-microns have outperformed the overall market in recent times, they were as much as 20 cents cheaper."

Northampton wool producer Haydn Teakle said his family's freshly shorn 21-micron Squarewell clip would most likely be withheld from sale until broader wool values recovered.

The fourth-generation farmer, wife Mary and sons Daryl and Wes run a 3100 Merino ewe flock on their 70-30 mixed cropping and sheep farm, which was established in 1902.

"We are looking to change the ratio to 60-40 crop-sheep with increasing costs associated with crop production," Mr Teakle said.

"Last year's crop was below average, although the grain price was all right, but with rising sheep prices we think the adjustment will be beneficial.

"Our lambing percentage was above average (103 per cent). Merinos have always been the mainstay, with 30 per cent of the farm non-arable."

The Teakles infuse Walkindyer Poll Merino genetics into their flock and have only to drive a short distance down the road to buy acclimatised rams from stud principal Warwick Teakle.

"Wool has plenty of competition from cotton and synthetic fibre, but we are optimistic consumers will turn the cards in our favour, particularly if the Australian dollar stays low," Mr Teakle said.

The National Council of Wool Selling Brokers of Australia executive director Chris Wilcox said the fall in the Australian dollar against its US counterpart since September had been remarkable.

"The question now is whether the lower exchange rate for the Australian dollar will be maintained or go lower," he said. "My personal view is that currency forecasting is the most fraught of any form of economic predictions."

Mr Wilcox said the fundamentals of relative interest rates and economic performance gave some guide to currency movements, but did not always explain why currencies were persistently strong or weak.

He said Consensus Economics forecast that the Australian dollar would depreciate further by June to 0.757 US cents and then continue to fall to 0.742 US cents in March 2016.

"Contrary to those forecasts, The Economist magazine's Big Mac Index in January actually assessed that the Australian dollar was under-valued by between 10 and 18 per cent against the US dollar," Mr Wilcox said.

"Leaving the vagaries of currency forecasting to one side, the decline in wool prices in US-dollar terms is part of an overall decline in the prices for commodities.

"After the significant volatility in commodity prices seen in the 2000s until 2012, the recent changes have been very modest."

Mr Wilcox said currently there was a weaker and less certain economic environment, particularly with the slowdown in China.

Elders said the structural changes in the Chinese economy were precipitating dramatic consolidation in the early-stage processing sector.

"Overcapacity in top-making has existed for a number of years and contributed to at times market volatility, and at other times market depression," an Elders spokesman said.

"Recently, the demise of a couple of aggressive trading identities and the bankruptcy of at least one larger combing mill and several smaller ones is creating the consolidation in the sector."

He said previously easy credit was no longer available as banks viewed the textile business as unpalatable and tough new environmental laws mean those mills that did not have adequate effluent disposal systems had to invest heavily to comply with regulations.

"Adding to the mix will be a further wage increase in China in 2015, expected to be around 8 per cent," he said.

"As further consolidation in the early-stage processing sector continues, efficiencies will increase, ultimately providing a stronger, more profitable industry.

"During the process, however, the mood is rather downbeat and while many accept that wool prices are probably low enough in US-dollar terms, not many are feeling confident that prices will rise in the short term."

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