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| Wool | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The eastern market indicator (EMI) price for wool remains relatively high despite a steady decline which began in February 2008. In early May 2008, the EMI fell below 900 cents for the first time since August 2007. This fall in prices is the combined result of a strong Australian dollar, causing wool to be more expensive for foreign buyers, and a slowing in the growth of the global economy, precipitated by the US sub-prime crisis, causing the demand for final consumer goods including woollen apparel to fall. For the 2007-08 season, the average price is estimated to be 9 per cent higher than the previous year, at 945 cents a kilogram clean. The factors affecting the price of wool in recent months are expected to continue into next season. Slowing global economic growth, combined with escalating prices for food and fuel, will dampen retail sales for luxury goods such as woollen apparel both in the United States and in Europe. As a result, demand for raw materials further up the supply chain is expected to fall, putting downward pressure on the prices offered for wool. Compounding this issue will be the value of the Australian dollar relative to other currencies, which is assumed to remain strong through 2008-09. These factors will put further downward pressure on prices. At the end of the 2007-08 season, the EMI in Australian dollar terms was approximately 200 cents, or 20 per cent, lower than its peak in January 2008. The strength of the Australian dollar relative to the US dollar has resulted in a smaller decline of 12 per cent in the EMI expressed in US dollar terms, demonstrating how the exchange rate can bolster the price paid for wool in a foreign currency. In euros, the EMI has fallen 17 per cent, making wool comparatively more affordable for European buyers. Reflecting the assumed strength in the Australian dollar and forecast weaker consumer demand, the EMI is forecast to fall by 9 per cent to average 860 cents a kilogram clean in 2008-09. A possible mitigating factor in the extent that prices fall is, however, the effect another year of low wool production will have on stimulating competition between wool buyers. |
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| Producers shifting to grain production in 2008-09 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The 2006-07 drought caused many wool producers to reduce sheep numbers as pastures dried up and the cost of purchasing feed outweighed the returns from the sale of wool or prime lambs. The contraction of the national flock, combined with lower fleece weights associated with poor feed conditions, has led to an estimated fall in shorn wool production to 405 000 tonnes in 2007-08. High wool prices in early 2008, combined with favourable summer rainfall, signalled the possibility of an expansion in the national flock in 2008-09. However since that time, continued high world grain prices have proven enticing to producers who have struggled financially since the drought. Many producers have therefore opted to reduce their reliance on wool production and put more emphasis into cropping for the coming year. This situation is most apparent in Western Australia but is also occurring in the eastern states. The national sheep flock is estimated to have declined to 82 million by June 2008 as a result of high slaughter numbers in 2007-08. Reflecting this, the number of sheep shorn is forecast to decline by 3 per cent in 2008-09. Assuming average seasonal conditions, the average cut per head is forecast to remain largely unchanged in 2008-09, with shorn wool production forecast to decline by 1.7 per cent to 398 000 tonnes. |
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| Mulesing — a challenge for the industry | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| In making decisions regarding flock size in the future, producers must now weigh up the costs of switching from mulesing to other methods of controlling fly-strike. The industry is working to phase out the practice of mulesing by the end of 2010. However, recent announcements by several high-profile international clothing retailers regarding mulesing are a matter of concern to the industry. Such concerns have put additional stress on an industry still trying to recover from drought, as well as coping with other issues such as labour shortages. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Export demand affected by exchange rates | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Without any real stocks to bolster supply, the volume of raw wool exports in 2007-08 has followed the production trend more closely than in the past. Wool exports are estimated to be 13 per cent lower in 2007-08, at 492 000 tonnes. Export earnings in 2007-08 have been supported by high average wool prices and are estimated to remain virtually unchanged at $3 billion. While a constrained wool supply will continue to affect the market in 2008-09, lower demand will have the greatest effect on prices. China will continue to be the largest buyer of Australian wool in 2008-09, although its demand is likely to be affected by the state of the US economy. In the United States, demand for woollen apparel from China is expected to fall in 2008-09 as a result of the US economic downturn and a weak US dollar. The softening of US demand will impact directly on the Chinese demand for Australian raw wool. Demand by European buyers is also expected to decline, following the recent downward trend of retail sales. The volume of total raw wool exports is therefore forecast to fall by 2 per cent in 2008-09 to 482 000 tonnes. Weaker average prices are forecast to result in a proportionately larger drop in export earnings, with an anticipated decline of almost 11 per cent to $2.7 billion. |
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| Wool becoming more competitive | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The price competitiveness of wool against other fibres is gauged by its price relative to that of synthetics and cotton. Since 2006-07 there has been a general up-swing in fibre prices, not just limited to wool. Between April 2007 and April 2008 prices for polyester and acrylic fibres have increased 11 and 17 per cent, respectively. This compares with a rise of 1 per cent in the EMI over the same period, although this small increase is the average of an 11 per cent rise between April 2007 and January 2008, followed by a steady decline through to the end of April 2008. The increase in man-made fibre prices is associated with the rise in crude oil prices, a major component in the production of these fibres. The increase in the price of man-made fibres, combined with the comparatively high prices for raw wool, has led to the wool-to-synthetic price ratio remaining relatively stable throughout the current season, at approximately 4:1. The ratio of the 21 micron wool price to the synthetic fibre price is forecast to decline by 22 per cent in 2008-09, to average 3.5:1, as a result of continuing high prices for crude oil and the forecast decline in the price of greasy wool. This price ratio is closer to the average annual ratios that occurred between 2004-05 and 2006-07 and reflects an expected increase in wool’s competitiveness. In the case of cotton, world cotton prices have also been increasing, with the Cotlook ‘A’ price index 33 per cent higher in April 2008 compared with April 2007. After remaining steady throughout the summer months at 5.9:1, the ratio of wool to the Cotlook ‘A’ index fell 8 per cent through autumn 2008, to average 5.4:1, as a result of continued high cotton prices. This implies that, during the recent autumn months, the competitiveness of wool relative to cotton increased. However, compared to the average of 4.5:1 between 2000 and 2007, wool has become less competitive than it once was. The ratio of the wool price to the Cotlook ‘A’ index has been less variable in 2007-08 than the previous year. In 2006-07, soaring wool prices and comparatively stable cotton prices resulted in a steep increase in the wool to cotton ratio, from a low of 4.3:1 at the beginning of that season to a high of 6.8:1 by May 2007. So far this season, the band within which the wool to cotton ratio has fluctuated has been more narrow, between 5.3:1 and 5.9:1. In 2008-09, the ratio of the price of 21 micron wool to the Cotlook ‘A’ index is forecast to fall by 11 per cent to 5:1, as a result of the forecast weakening of the wool price combined with expected increases in the world cotton price. |
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