The Australian wool market saw further price declines last week - a bit more than was initially expected occurred as buyers appeared to sit back and watch each other to see who would blink first.
The first day of selling on Wednesday saw Merino fleece 50 to 80 cents cheaper on the back of a very poor quality selection and buyer indifference or indecision.
- Confidence in the wool market starting to erode
- Next generation of Merino enthusiasts ready to take up challenge
A better quality selection on Thursday and the feeling from the trade that perhaps they had overdone things saw prices still on the negative, but much less than the previous day.
At the end of the week, prices for merino fleece had fallen by 50 cents, crossbred wools by a dollar, and carding wools were back only 30 cents.
This resulted in the Eastern Market Indicator (EMI) being quoted 60 Aussie cents lower, 50 US cents and 40 euro cents lower, but in typical fashion for the often volatile wool market it has probably over-cooked the correction a bit.
On the US dollar based charts the wool market in the finer micron categories has now broken the rather stellar bull run, which began back in 2015, however, the medium merino categories are still above the trend line, no doubt thanks to the supply situation.
When viewed in Australian dollar terms, all of the Merino categories are still well above this longer-term trend indicating that all is not lost. Even though we have seen a fairly savage correction over the past couple of weeks, it was probably 'one of the ones, that we had to have'.
The market had certainly been trading on thin air, with the lack of demand signals being drowned out by constant chirping about lack of supply. Now that we have pulled back a notch, and prices are basically back to the same level of last October the market can consolidate and think about the next move.
Most participants agree that the downward movement was enough, or perhaps a bit too much, but people are nervous enough to wait and see others dip their toe in the water before jumping in themselves. Many along the processing pipeline are licking their wounds and the recent price movements highlight that the wool market is not for the faint hearted.
Those who purchased a container of greasy wool only a short three weeks ago to fulfil a processing contract, or simply to keep machines running are now looking at a 'paper loss' of 8 or 9 per cent, which equates to close to $20,000.
Supply will continue to be an issue with only about 30,000 bales on offer next week, and 20,000 the week after.
Of course the market has previously moved the other way, but often the downside moves are more swift than the gains, and the profit margins are never big enough to cover a loss of this magnitude. All the more reason for people to sit on the sidelines and try to be sure about the market direction before they burn any more profits, and no doubt have difficult conversations with the auditors about mark-to-market valuations.
The backdrop for not just wool, but all textiles and many other commodities as well continues to be constrained by various economic issues around the globe. These issues obviously create a negative perception in the minds of consumers, which then consequently flows right the way back along the processing chain to ultimately auction room prices for greasy wool.
Interrupting the negative cycle of doom and gloom that is perpetuated by the 24/7 news and current affairs machinery is not an easy task, but one that needs to be front and centre for the marketing gurus of every company in the Merino wool industry.
Demand has certainly taken a hit, not only as a result of the high wool prices, but probably more so in response to the trade war, Brexit saga, Euro zone issues and general sluggish world growth. Optimism that the US and China will reach a trade agreement has further waned in recent days.
However, as the CBA Agri Commodities Daily Alert pointed out some commentators are wrongly positioning this to be a long-term situation. Whilst there is no doubt a degree of difficulty lies ahead to reach consensus, neither China nor the US can afford to stretch this much further.
The negative consequences are already plain to see in the Chinese economic conditions, and the imposition of the latest tariff increases by the US will ultimately flow through to higher consumer prices for US consumers.
A faltering American economy, as evidenced by recent data, can hardly sustain a 25 per cent price hike on a raft of everyday items that the American people buy from Chinese companies.
Any incoming funds from the higher tariffs is quickly leaving the Fed coffers as aid to American farmers struggling to find alternative markets for their soy beans, and presumably discount vouchers for Walmart to compensate shoppers for the higher prices, again highlighting the no win situation in a trade war.
So, a June resolution just prior to the G20 meeting so that Presidents Trump and Xi can shake hands and make up on neutral territory would seem like a very sensible timeline to put this issue to bed.
Hopefully the market can find a firmer footing in the next couple of weeks to help restore a bit of confidence among the buyers and early stage processors.
Supply will continue to be an issue with only about 30,000 bales on offer next week, and 20,000 the week after, but if the encouraging signs from late last week are sustained we should see a recovery in the order of 20-30 cents.