abare.gov.au - Australian commodities – September quarter . volume 15 . number 3 2008

Wool

Caroline Gunning-Trant

Australian shorn wool production is forecast to continue its downward trend in 2008-09, reaching an 80 year low of 387 000 tonnes. The global economic slowdown will continue to affect consumption of woollen products, resulting in a softening of demand for raw wool. Reflecting this, the eastern market indicator price (EMI) is forecast to average 880 cents a kilogram clean, around 7 per cent lower than in 2007-08.

Prices to reflect softer demand

In 2007-08, the EMI averaged 945 cents a kilogram clean, 9.4 per cent higher than 2006-07. After reaching a peak of 1045 cents a kilogram clean in January 2008, it declined steadily, ending the season 19 per cent lower. The price decline can be attributed to softening demand brought about by the global economic downturn, combined with a strong Australian dollar relative to the US dollar which made wool more expensive for foreign buyers.

So far this season the EMI has averaged 866 cents a kilogram clean, 5.2 per cent lower than for the same period last year. However, up to mid-September, the EMI averaged 2.4 per cent higher in US dollar terms because of the strength of the Australian dollar relative to the US dollar. The positive effect on wool prices of a decline in the value of the Australian dollar is evident by the 3 per cent increase in the EMI which occurred when the Australian dollar fell below US$0.90 in mid-August and again when it fell below US$0.85 earlier this month. For 2008-09 as a whole, the assumption of a weaker Australia-US exchange rate has led to a marginal upward revision of the ABARE price forecast made in June, to 880 cents a kilogram clean.

Production to be lower in 2008-09

The number of sheep shorn is forecast to decline to 87 million in 2008-09 – a fall of 4.4 per cent from the 2007-08 season – as a result of a smaller flock size. Good summer rains in many areas of the wheat-sheep zone are expected to translate into better fleece quality and improved average cut per head during the spring of 2008. So far this season this has been reflected in the Australian Wool Testing Authority (AWTA) key test data which indicate that staple strength for July and August was 1.3 per cent higher than for the same period last year. For New South Wales, the largest wool-producing state, the increase was even higher at 3.3 per cent. Average cut per head for 2008-09 is forecast to increase by 6 per cent compared to 2007-08, to 4.47 kilograms a head.

Despite these positive indicators regarding the wool clip, it is the smaller size of the national flock that will be the key determinant of the wool supply. In 2008-09, the total supply of wool is forecast to be 424 000 tonnes. Of this, shorn wool production is forecast to account for 387 000 tonnes, 3.3 per cent lower than 2007-08. Wool offerings so far this selling season have provided support for this forecast, with offerings 8 per cent lower than for the same period of last year. While spring shearing is now well underway, no significant reversal in the downward trend in total offerings is anticipated.

Wool outlook

2006-07

2007-08

2008-09

% change

Sheep numbers

million

– 3.8

Sheep shorn

million

100

– 4.4

Wool production (greasy)

– shorn

451

400

387

– 3.3

– other

– 14.0

– total

502

443

424

– 4.3

Wool exports (balance of payments basis)

– volume (gr. equiv.)

566

492

459

– 6.7

– value

A$m

3 065

2 803

2 444

– 12.8

Market indicator (clean)

– eastern

Ac/kg

864

945

880

– 6.9

– western

Ac/kg

856

947

866

– 8.6

Auction price (gr.)

Ac/kg

544

593

559

– 5.7

f ABARE forecast. s ABARE estimate.

Slowdown in global economy to dampen demand

At this time last year there was generally less pessimism about the severity and duration of the US economic slowdown resulting from the sub-prime crisis. Demand for raw wool remained firm in the face of concerns about the falling supply of Australian wool, which led to a renewed upswing in raw wool prices. However, the effects of the US economic slowdown and its follow-on effects are now well-known, affecting, among other things, consumer sentiment in OECD economies. Despite Australia’s ongoing wool supply constraints, expectations of weak future demand for woollen products in the United States and European Union are forecast to lead to a softening of demand for raw wool in 2008-09. This will put downward pressure on wool prices, possibly mitigating any positive influence from a weaker Australian dollar.

China is, and will continue to be, the largest buyer of Australian wool, accounting for roughly two-thirds of Australian exports of wool (greasy equivalent). However, in 2008-09 supply constraints will lead to a smaller volume of raw wool shipments. The volume of total Australian wool exports (which includes greasy wool, semi-processed wool and skins expressed in greasy wool equivalents) is forecast to decline to 459 000 tonnes, a fall of 6.7 per cent from 2007-08. When combined with the anticipated fall in the wool price, export earnings are forecast to fall by 12.8 per cent to $2.4 billion.

Wool becoming more competitive

Wool competes in a market where there are ready substitutes available to processors who are under intense pressure to keep costs down in order to remain competitive. The price competitiveness of wool is commonly gauged by its price relative to that of its principal substitutes, synthetics and cotton.

The ratio of the 21 micron wool price to the synthetic fibre price averaged 4:1 in 2007-08, a 14 per cent increase from the average of 3.5:1 in the first half of the 2000s. This occurred because the price of wool increased at a greater rate than the price of man-made fibres. In 2008-09, a lower forecast wool price is expected to lead to a fall in the wool to synthetic fibre price ratio, with it returning to its longer-term average of 3.5:1. The decline in the 2008-09 price ratio reflects the increasing competitiveness of wool relative to synthetic fibre. This is a positive sign at a time when the current softening of global consumer demand is affecting all textile industries.

In the case of cotton, the ratio of the price of 21 micron wool to the Cotlook ‘A’ index has been declining since January 2008, from 5.9:1 in January to 5:1 in July. This declining price ratio reflects the downward trend in wool prices and the continuing upward trend in cotton prices. So far this season, the Cotlook ‘A’ index has averaged 16 per cent higher than the same period a year earlier. With cotton prices forecast to remain high in 2008-09, the competitiveness of wool relative to cotton should improve relative to 2007-08.

Prices to reflect softer demand