The 2016/17 wool season kicked off in earnest in August, with the trading recess over and the sales back in action. And, after the strong performance of 2015/16, expectations for the new season are high.
Critical for the outlook will be just how quickly wool supply responds to improved seasonal conditions. Early forecasts are that the next Australian clip will be a similar size to the 322 million kilograms which is currently estimated for 2015/16 (and which reflects a seven per cent year-on-year drop – the lowest production in 90 years). This contracted supply helped support prices last season, particularly mid-micron wool types which saw record season- average prices in 2015/16.
The flipside of the equation is, of course, demand. And it has been an interesting couple of years on the demand side, with some trends that have had strong influences on the market, such as growth in knitwear and outerwear categories.
The question though remains – what factors are likely to change over the next 12 months that will influence the wool market and of course, very importantly, the prices back to growers?
Fashion will (of course) be one but getting a crystal ball out on fashion trends can be dangerous. The buzz around double-face fabric (used in overcoats) that helped propel crossbred prices to record highs last year has certainly waned – and with it crossbred fibre prices, which have started the season some 15pc to 20pc lower than the 2015/16 highs.
Merino cardings have held their strength and opened the year marginally higher than 2015/16, but whether this can continue will be influenced by continued growth in end markets such as knitwear.
The lower Australian dollar in recent seasons has also been a critical factor for the wool market and remains influential. The Eastern Market Indicator has trended up in USD terms through the first half of 2016, breaking USc1000/kg in the week before the recess back in July, after starting 2016 at below USc900/kg.
Prices, however, remain subdued for wool’s competing fibres (including cotton and synthetics) and the price gap continues to widen to wool. This will remain a risk for wool through the season, as the price outlook for the other fibres (although arguably brighter than in recent years) is clouded, with high stocks and overcapacity limiting the potential upside.
While demand risks will need to be watched, the expectation of continuing historically-low supply augurs well for wool prices and (all going well) offers opportunities for Australian growers to leverage the tightness in the market.
- Georgia Twomey is a commodity analyst.
