Working out what's a good value for wool

Working out what's a good value for wool | ALPA Stock Talk


Markets
One of the best places to start when considering the "sell or hold" conundrum is to look at the current market value in an historical context.

One of the best places to start when considering the "sell or hold" conundrum is to look at the current market value in an historical context.

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It is worth considering the quality of your offering and the relative competition you are likely to receive when determining your "sell or hold" strategy.

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My first foray into the ALPA Stock Talk column has not come at a positive time for the wool market.

The benchmark Eastern Market Indicator (EMI) fell 172 cents a kilogram for the month on June, which represented the largest monthly fall since 1991 when the Reserve Price Scheme collapsed.

On the back of negative market movements, particularly large corrections, the question is often asked, should I meet the market and sell?

Or should I hold off until market conditions improve?

There are certainly arguments for both selling and holding during a downturn in the market. In this column we will look at some of the factors that should be considered when determining a marketing strategy.

I have always been of the opinion that one of the best places to start when considering the "sell or hold" conundrum is to look at the current market value in an historical context.

One of the tools that I use regularly are percentile charts. Put simply, percentile charts are a way to measure the period of time an indicator has traded above or below a certain level.

If we apply this concept to the Eastern Market Indicator, we discover that despite recent falls, during a 10-year period the Indicator is currently trading at the 85th percentile, meaning that the market has only been higher 15 per cent of the time.

It can be very easy to look at how far the market has fallen in the past month or the past year but if the market has been through a strong up swing prior to the decline, current market levels may still represent good value.

One thing that all agents tend to agree on is that strong buyer competition is essential to achieving a good sale price. Markets that are falling are often associated with poor buyer competition and while this is regularly the case there are exceptions.

Offerings with superior quality tend to defy the trend and receive strong competition. The added competition generally means that these quality lots outperform the market.

It is certainly worth considering the quality of your offering and the relative competition you are likely to receive when determining your "sell or hold" strategy. An additional factor that should be considered is the cost to hold.

Obviously in the case of livestock there are ongoing feed bills (particularly during the adverse seasonal conditions that we are currently experiencing) but even in the case of wool, storage costs can accrue.

Where overdraft accounts are in use it is important that calculations consider the interest costs or savings that result from the decision to sell or hold.

Despite the fact that where commodities are concerned no one has a crystal ball I believe that through some basic analysis and planning individuals can make an informed decision that will suit their business model and ultimately assist them in achieving a better commercial result.

  • Ben Stace is the southern NSW regional manager for Australian Wool Network, Goulburn, and a member of Australian Livestock and Property Agents Association (ALPA).
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