INTEREST in forward sale contracts of Australian wool clips has accelerated rapidly in the past fortnight as a reflection of rising wool sale prices in all categories.
Forwards trading activity in May was high with contracts traded to 12 and even 18 months out and 12 month contracts at 1225 cents a kilogram for 21-micron wool.
As a result Riemann Agriculture reported its second biggest month in four years with 773,875kg traded, not far from the record of 1.2 million kilograms set in 2011.
Forwards are all about confidence, according to woolgrower and broker Don Macdonald of Macdonald Wool, Dubbo.
"The forwards market has been dead for ages and now, all of a sudden, it's come to life as obviously the wool market has," he said.
"Traders need to protect themselves from sudden rises while wool growers need to protect themselves from sudden falls, so hedge from the market falling too far.
"In the past couple of weeks we've reached this middle ground where growers are willing to trade contracts because they are trading at a level they are comfortable with and doing it as a form of insurance."
Mr Macdonald said most growers who trade forward contracts would only hedge a quarter or up to a half of their production.
"Growers take out contracts for a third of their production hoping the market keeps rising because the other two-thirds are sold on the spot market for more."
With the wool market selling 21-micron wool at more than 1200c/kg, Mr Macdonald said growers were back in business.
However, forward trading is with minuscule amounts of the national wool clip - only one per cent, according to Riemann's exchange services head Peter Coyle, Sydney.
"Even at prices we are seeing now that are well in the upper echelons of anything we've normally seen, the percentiles since 2004 are showing the market trades above these prices in some instances for less than four or five pc of the time."
Mr Coyle said that's why some woolgrowers viewed this as opportune to try and extend the good prices into next shearing and even into the one after.
Lempriere wool trading division manager Evan Croake, Melbourne, said the current spot market prices were "incredible".
"In general, demand from China has improved dramatically and this has coincided with an extre-mely tight supply causing the market to go as far as it has," he said.
"Further out the business is continuing to look strong.
""There are more clients who are comfortable and able to book contracts further out.
"Forward prices are currently trading at a discount to the current market, but there is a lot more confidence in China at the moment."
Mr Croake said there were more woolgrowers and woolbrokers looking towards forward trading.
"Once we broke the 1200c/kg mark for 21 micron we recorded a lot more growers and broker who were a lot more active and a lot more interested in booking forwards further out."
Hedging covers production costs
YEOVAL woolgrower Steve Gough is a firm believer in hedging his woolclip and sells between 180 to 200 bales each year from his "Belmore" flock of 3400 Langdene-blood ewes growing 19- to 20-micron wool.
"I know my cost of production and I came up with a figure of 1200 cents a kilogram for 21-micron wool to give me a profit I can sleep with," Mr Gough said.
"It's a pretty simple formula but I only forward sell enough to cover my costs."
This year he forward contracted 5000kg (30 per cent of his fleece wool production) at 1205c/kg due on September 9.
However, Mr Gough hadn't as yet completed this year's costs, but as they had been rising in each of the past three years, he was expecting costs to reach a possible 900c/kg.
"So I've readjusted my trigger point to 1250c/kg or even 1300c/kg to keep with those costs knowing I can still make a 25pc profit," he said.
He is now considering whether to enter more contracts at this level.
While the forward sales are not big percentages of his wool clip, Mr Gough said the "ice-cream" came from selling his cast-for-age ewes and prime lambs.
