Wool industry expects a full Christmas stocking as main markets resurge

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Industry observers back up a commodity report that gives wool producers a thumbs up for a full end of year recovery

Shearers will find it hard to retire as long term predications see growth ahead with a forecast rise in overall production of over 20% by season 2025-26

This forecasts is based on increased wool demand expected from the northern hemisphere winter kicking in at the end of this year. If this eventuates it will have a major bearing on many aspects of Australia’s wool industry over the course of 2021.

Madeleine Swan, Associate Director of Agribusiness Research at ANZ, said: “The next Northern Hemisphere winter won’t be rolling around until the end of this year, however the world’s woollen mills and clothing manufacturers will already be doing their sums on the volumes of wool required to provide for that time when it comes.”

“As large European markets for woollen garments such as France and Italy continue to feel the impact of COVID lockdowns, suppliers are needing to look longer term.”

“On current outlook, this could be to a time when national vaccination programs have reinvigorated economies and consumer behaviour, so garment manufacturers should start planning their supply chain processes accordingly,” Ms Swan said.

While short to medium term wool demand will be dependent on global economic conditions, the overall supply of Australian wool onto the market is forecast to grow for at least the next five years.

The first quarter of 2021 has largely seen wool price indicators climb back to a level last seen a year ago, before prices fell around 50 per cent between the start of 2020 and September.

Looking ahead it is expected wool producers may have to budget on current forecast prices that are likely to plateau at around the 1,300 AC/kg level

In a further sign of the positive impacts of the ongoing relatively good season, the Australian wool clip is forecast to climb by a marginal 1.7% in 2020/21 to 288 thousand tonnes, despite a 5% fall in the number of sheep shorn, reflecting the positive impact on sheep condition and wool yields of the good season.

As the overall levels of wool production grow, with a forecast rise in overall production of over 20% by 2025-26, concerns may arise that this could lead to a build-up of supply in the system.

If wool producers increased domestic stockpiles to the levels where they could cause a structural correction in the market, falling prices could cause many producers to move away from wool sheep.

Optimistically, however, the current forecasts also indicate that wool exports are likely to continue to grow at the same strong rate as production, limiting the levels of end stocks.

A market with many swings and balances

Local wool producers, as with every farmer to some degree, are impacted by two fundamental factors: The conditions impacting the production of their product and the circumstances surrounding the sale of it, and the price they receive.

While a reasonable amount of the former is within their control, apart from the obvious factor of the weather, most of the sale is up to many circumstances beyond their control, mostly well away from Australia.

The first quarter of 2021 has largely seen wool price indicators climbing back to a level last seen a year ago, before prices fell around 50% between January–September 2020. With the benchmark Eastern Market Indicator having hit a low of around 850 cents last September.

Prices have now risen solidly again, to reach around 1,300 Ac/kg, but of course that can fluctuate.

For some wool exporters, the challenge of accessing available shipping freight space has continued to create issues, which may impact the market in coming months.

If importers, not just in China, but in markets such as Europe and India, become increasingly uncertain that their wool purchases will reach them, it may cause some softening in the market until greater certainty of delivery is achieved.

On farm stock levels may increase

Importantly, it has also been noted by market observers that the recent high wool auction prices have also been partly maintained by many growers withdrawing their supply from sale.

This could be driven by a range of factors, including the hope by producers that prices will continue to rise.

In addition, many producers will be running mixed farming operations and may find themselves in such a good financial position from the sale of their sheep and cattle this year that they can afford to hold onto their wool clip for longer than normal.

Looking ahead, the current forecast is that prices are likely to plateau at around the 1,300 AC/kg level. While the likely increase in demand from buyers will serve to push prices up.

However the uncertainty around freight, combined with the possibility of wool being stored on farm coming back onto the market could, at the same time, provide a dampener to any strong upward price movement.

In the medium term, the overall supply of Australian wool onto the market is forecast to grow for at least the next five years.

In a further sign of the positive impacts of the ongoing relatively good season, the Australian wool clip is forecast to climb by a marginal 1.7% in 2020/21 to 288,000 tonnes, despite a 5 per cent fall in the number of sheep shorn.

This reflects the positive impacts of the good season on sheep condition and wool yields.

As the overall levels of wool production grow, with a forecast rise in overall production of over 20% by 2025-26, concerns may arise that this could lead to a build-up of supply in the system.

This could increase domestic stockpiles to the levels where they could cause a structural correction in the market, where falling prices cause many producers to move away from wool sheep.

Optimistically, however, the current forecasts also indicate that wool exports are likely to continue to grow at the same strong rate as production, limiting the levels of end stocks.