Australian wool auction markets surged further into record territory again this week as buyers took to the selection on offer with gusto. Widespread belief in the price abounded pre sale, as many trade participants reported most of, if not all, stock lots being held by exporters and Chinese based traders selling at full market rates. All destinations were keen to take whatever was available. India and Italy were interested, but it was mainly the wool starved mills of China that were hitting the exporters up for quantity. As a result of the intense trading action, all wool sectors appreciated by varying margins which saw the market lift 51ac clean/kg to the highest ever level in the AWEX Eastern Market Indicator (EMI) of a neat 1500ac clean/kg, a 3.5% weekly gain.

Over the past 2 years in particular, demand has been steadily building, increasing the general wool price in AUD terms by 407ac clean kg and the USD price BY 298usc clean/kg or 37% and 35% respectively. Many of the more experienced local trade operators have reported the growing demand of recent years as similar to the build up to the halcyon days of the insatiable USSR appetite for buying Australian wool which saw prices hit record levels in the late 1980’s.

This seasons price gains in the Merino sector continues unabated with just the odd week or two of subdued or dampened price levels. The general market measuring stick, the EMI, has progressed steadily from 1330ac clean kg in July 2016 to 1500ac clean/kg, a 13% gain in just 8 months. In USD terms, the gains are even better at nearly 16%, an unmistakeable indicator of our major overseas manufacturers and their customers willingness to pay the ruling price of the day and a pretty decent pay rise for Australian wool growers.

Significantly these price gains have been achieved In a season that has so far produced more than 60,000 additional bales or a 5.7% increase of first hand offered wools at auction and AWTA key test data figures showing an increase of wool tested of 3%. Unquestionably, demand for wool is outstripping supply and it is this improvement in demand that is the driving force behind the steady rise in returns for wool growers. Hopefully these current prices will give further confidence to land holders that a wool and sheep operation is a worthwhile and profitable pursuit.

The Merino fleece market this week across Australia can only be described as intense. Many specific types and descriptions were being “bought at best” where basically the auction buyer figuratively shuts their eyes and keeps bidding until they hear their name called. The best superfine wools finer than 19 micron and suitable to Europe were the major beneficiary and were upwards of 140 to 180ac clean/kg dearer for the week. The lesser types in this category were also hunted strongly, and 75 to 100ac clean/kg was added to their market values by the close. 19.5 and broader fared almost as well by registering general gains of 55 to 70ac clean/kg. The large Chinese indent operators certainly participated more noticeably, but three or four of the major trading companies were still able to wrestle most of the quantity available away from them.

Merino skirtings came back to life this week and price levels lifted substantially and matched the general fleece market where the better finer types were foremost in buyers activity. Chinese top makers were the main buyers. Cardings are at record levels but in a very strong week were the least in their gains, albeit adding a general 20ac clean/kg which put all indicators over 1200ac clean/kg. The crossbreds continued their recovery and all types finer than 30 micron were 20 to 40ac clean/kg dearer. In a very limited offering of the broader than 30 micron wools, prices were generally the same, but really “too insufficient to quote” was probably the most accurate.

Quantities have lifted for next week , as is now a common tactic with most market major rises, and around 47,500 bales is to be offered. Strains on some buyers access to funds and a large enough volume to let buyers ease their buying intensity are forecast to impact just slightly enough on the market to allow a more selective and a combative approach to most buyers operations. A very slight pull back was witnessed towards the close of selling, but this was restricted to the harder to place wool types.

AUD Commentary - SAW

After a big week of very positive economic news, the Aussie Dollar surprised on Friday, by falling around 100 points to a one month low of .7560, from Thursday’s .7665 as the USD surged to a seven week high against a basket of major currencies. The USD was well supported by President Trumps speech to Congress and by continuing positive U.S. data releases, including news on Thursday night that U.S Jobless claims had hit a 44 year low, stoking fears of inflation with near full employment. Also, on Thursday U.S Fed Governor Lael Brainard said “that an improving Global and U.S Economy meant it would be appropriate to lift rates soon”. Supporting the early rate rise view, a Bloomberg Poll out overnight showed an 86% chance that the Fed will raises its benchmark rate by 25 basis points at its March meeting, and that’s up sharply from 50% on Tuesday. Despite the fall in the AUD, Richard Grace, chief currency strategist at the Commonwealth Bank suggests that traders shouldn’t get “too bearish” towards the Aussie, pointing to a strengthening global economy, still-high commodity prices, the likelihood of stronger economic growth in Australia and a continued narrowing in the nation’s current account deficit. Technically the Aussie is still caught inside a trading band with strong overhead resistance at .7760 and support at .7512.

Southern Aurora Wool forwards report

The forward market traded robustly on the back of another positive auction series. Solid trading on Monday and Tuesday pre-empted the auction opening with most merino categories rising 50 cents and the EMI reaching 1500 cents for the first time. Most interest from Exporters focused around the March to July window but growers were able to gain forward cover into the spring and beyond as prices in the spot market set new records. The market traded 2 years forward with February 2019 trading at 1600 for 19.0 micron. Although heavily discounted to spot this level is in the 90th percentile of historical prices and also were the spot market was trading just prior to the Christmas recess.

Exporters remain extremely cautious at these record levels. Supply and demand balance, AUD/USD ratio, current high volatility and over-all risk assessment will factor into decision marking for both buyer and seller as we move into the back half of the season. The market will be looking to off shore confirmation of the continuing rally but we expect opportunities to avail both buyer and seller next week.