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Has the wool game changed?

Posted by Robert Herrmann on 8 December 2017
Robert Herrmann
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As Charles Massy explains, from the 1840s wool was the backbone of the national economy. Indeed, in the mid-20th century, Australia boasted the greatest wool industry the world had seen.

 

In this article, we ask, has the wool game changed?

 

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This meant there was plenty of wool, the general acceptance was that a reserve stock of wool was always in existence. Stocks were either held by the producer; either waiting for prices to rally or in transit from sheep’s back to sale. Or it was the “trade” holding stocks to meet the long pipeline of wool to the customer.

 

Leading up to the 1990’s it was also the large flock that produced huge sale catalogues, with growers sometimes waiting months to get their clips into sales. Up to 180 million sheep were shorn annually.

 

To give perspective to the scale of the industry, selling centres were scattered across the continent, including capitals cities Hobart, Brisbane and Adelaide. Even Geelong, Portland, Albury, Albany & Goulburn conducted sales, with Melbourne and Sydney selling over three days.

 

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These were the days of big supply, sheep in abundance and wool buyers presented with willing sellers and large volumes.

In this situation buyers could be selective, stepping out of the market and back in at random. They held sway over sellers – if you didn’t buy today there was always next week when another significant offering would appear.

 

This led to an exuberance that begat the Wool Price Reserve Scheme (RPS) to try to stabilise wool prices in the face of high production.

 

History records that on the back of the RPS, the industry self-destructed, culminating in the February 1991 crash of the Australian Wool Corporation's RPS.

 

The fallout from these events has been the steady decline in wool production, to the point that now the power for determining supply is in the hands of the growers. The wheel has turned!

 

We have commented previously that the current market conditions are unique in our time of observation. Wool supply is moving through the system quickly; that is there are little stocks held either on farm, in broker stores or in mills.

 

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Sheep farmers are experiencing record income inflows; with not only wool prices good but so too are sheep and lamb prices. This will mean that any retracement in price in the future will be met with “cashed up” wool producers holding back wool from the market and reducing supply to processors.

 

As we said, these are unique times where it could be argued that the producer is able to influence the market by withholding supply. The qualifier is that any supply “squeeze” may have short term market influence but it is unlikely to be a long term positive factor on price. In the end, customers will adjust orders to meet supply and pay a price that works for their customers at retail level.

Topics: Wool market / wool price, Australian wool industry

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