Wool Wrap | Season ends on softer trend

At the close of the auction prices had fallen by 50 cents a kilogram, as measured by the AWEX Eastern Market Indicator, however the currency played a large part in this decline with US dollar prices only US19c/kg weaker.

The Australian dollar had been appreciating for most of the week as currency traders took a 'risk-on' position, pushing money out of the US dollar pot into Asia positive investments - of which the Australian dollar and to a lesser extent the Kiwi dollar are still among the current favourites.

Nevertheless, the mood in the auction room was less than buoyant, and as with many other commodity and financial markets around the world all eyes were on Osaka for the G20 meeting. Of much more interest was the meeting between President Trump and President Xi.

The Australian wool market has had a pretty stellar year in 2018/19, but failed to live up to expectations by the end of proceedings.

A record EMI of 2116c/kg was reached in August last year, on the back of a flurry of Chinese fake fur demand, and then it looked like it would surpass this record in February/March when the processing fraternity in China realised that early calls of a nearly 20 per cent drop in production were not going to be far off the mark. Since then it has been a struggle to maintain the lofty highs, and the market has been troubled by a lack of confidence, price resistance and cash flow issues.

The trade war issue will undoubtedly be blamed for bursting the bubble, yet there have been several other factors unique to the wool industry that have been equally important in the longer term. Not that the bubble has burst and left the industry in chaos as has been the case in previous times.

The 21-micron (for those still able to offer it in this drought affected clip) is still commanding somewhere around 2000c/kg - or will be when we get enough lots for AWEX to quote it. Not so long ago we were struggling to keep this important indicator above the 1000c/kg mark, which was considered break even.

No doubt, with the inevitable price rises, the break-even level is higher than 1000c/kg for the average Merino wool grower, but 2000c/kg for 21-micron Merino plus the fairly handy meat price at present still looks very favourable. Just add water and life would be very good indeed.

So, what about the issues that have led to the price correction since February. The trade issue still remains front and centre, but with the agreement during the weekend for China and America to return to the negotiating table is hopefully moving towards a resolution.

It will not be something that is sorted by the end of this week, but with the issue beginning to bite deeply on both sides of the Pacific, the pressure to find a solution is reaching a critical stage. The demands on both sides are basically huge and probably intractable, however there is scope to find a win-win solution if there is enough goodwill forthcoming.

It will presumably reach an interim solution, with some fairly mundane concessions from either side, that can be sold domestically in both camps as a victory, with a lot of points left in the too hard basket.

Other factors that have caused the wool market to come off the boil have arguably been resolved. The price resistance issue, whereby worsted fabric manufacturers in particular, but everybody to a degree, were being told by their customers that Merino wool was becoming too expensive.

Rather than the actual cost, it was more a case of the speed of the increase that did not allow retailers to adjust.

We have now seen a reduction in prices back to where they were at the end of 2017, which was in the midst of a good selling season for manufacturers of woollen products, and it should be a much easier conversation for them as we head into the next round of exhibitions for yarns and fabrics.