Spurred along by insistent demand from China and constrained supply from low sheep numbers, Australia’s 25,000 woolgrowers are reaping the benefits of a resurgence in the wool price.
The question is now begging, has the market peaked?
Last week it was another record when the benchmark eastern market indicator (EMI) fetched 555 cents a kilogram higher than 12 months ago and broke through the $20 kilogram mark for the first time, finishing on 2027c/kg clean.
The week’s rise was on par in US dollar terms, increasing 33c to hit 1533c. In US currency this was also a record, being 18c above the previous high of 1515c in June 2011 when the US exchange rate was 105.5c.
Of the 30,439 bales offered, only 2.3 per cent were passed in and AWEX reported the value of the wool sold was $65.7 million, taking the season total for our wool clip to $3.2 billion providing a major boost for regional Australia.
It’s a different story from the industry in the 1990s after the collapse of the reserve price recovery scheme which kept the price artificially high, but consequently led to over production.
In 1998 prices hit a low average of $5.10/kg, well below the cost of production, causing many farmers to leave the industry. In turn, the size of Australia’s sheep flock shrunk.
National sheep numbers have fallen from 180 million in 1992 to about 70 million now.
Are we there yet?
Market intelligence expert, Scott Carmody, doesn’t believe that the wool market has peaked.
He said it is a market driven by demand, not supply, with the key drivers being China, who import nearly 80pc of Australia’s wool.
“Their (China’s) appetite for wool at the moment is insatiable, they need our raw materials to keep their machines running. If they don’t buy our product, then they don’t have the chance to make money,” Mr Carmody said.
“So where we go from here, that is their determination. They’re driving the market and they are driving it to a price until they see a resistance at retail.”
On the back of a visit to Chinese wool mills, he said the two concerns discussed were the quality and volume of the wool.
“We are now seeing six to eight major manufacturers and buyers of Australian wool in China and they are going from strength to strength,” he said.
“As they go on they will determine where this market peaks.”
Mecardo’s Market Analyst Matt Dalgleish said we haven’t out priced ourselves in the wool market.
“What has happened over the last few years is we have seen our domestic prices increasing over time, but the Aussie dollar has come off 25pc since 2011 so the increase in nominal terms, that the farmers are getting here, actually has been assisted by a falling Aussie dollar,” he said.
“So from an international perspective, foreign buyers haven’t noticed a great deal of difference in change of prices.
“Therefore the scenario is we haven’t priced ourselves out of the market.”
He said China is a market that is growing in it’s appetite for prestige products, so something with an Australia label will attract a premium.
“We have been bullish with sheep, lamb and wool in Mecardo and in the longer term we are still bullish in the market sector, but that is not to say that a seasonal condition can see a down turn in price,” he said.
Australian Wool Innovation (AWI) CEO Stuart McCullough said wool is finally making what it deserves.
“I think it is well known that I’ve thought wool deserved to be a $20/kg fibre,” Mr McCullough said.
“But it has moved there quite rapidly in the last little while, I wouldn’t mind it settling into a bandwidth that it bounces in for a while that gives the processors and consumers of the world a bit of time to digest these sort or price levels and then moves on again.”
With just five sales left before the winter recess, there are concerns woollen mills here and overseas are not going to have enough supply to keep their mills operating over the three week recess while sales cease.
“We are now heading into a period in our season where volumes will decline,” Mr Carmody said.
Mr Carmody said not only are producers shearing early, but competition for our farmland is incredibly strong.
Producers are having to make the decision on whether to hold on to their sheep and grow more wool or sell them for meat, he said.
“Barley has jumped $80 a tonne and hay has doubled in price, so offloading your sheep so as not having to feed them and getting $170 per head is pretty attractive,” he said.
“More people are only keeping the core breeding stock now, selling the rest and hoping that it rains soon.”
Mr McCullough said there are a number of key indicators that look positive from the demand point of view and look a bit pessimistic from the supply point if view because of the declining season.
“As we get rain, that will start to improve, but with 350 kilograms of wool in Australia, any poor season, we will see volumes contract, and with any good season, we will see them grow a little bit,” he said.
“But the growth from people turning back to wool will be very modest because other competitive land uses are so good at the moment.”
Looking ahead, total offerings over the next three sales are 14.9pc greater than in the same sales last year as growers rush to shear and offer wool for sale.