Many options exist for marketing a wool clip. Understanding the value of the clip before sale can assist in assessing marketing options and the use of price risk management tools. Knowing where current prices sit in relation to historical values can also help reveal the current point in commodity price cycles.
Options for selling wool
Woolgrowers have many selling options available to them. The options will vary according to the scale of the enterprise, and the characteristics of the wool produced (e.g., micron, market speciality, etc.). Woolgrowers are advised to work with their wool broker or advisor to secure the true market value of their wool, when using any of these selling options.
If immediate sale prospects are poor at the time of shearing and the outlook is for improving price, woolgrowers can consider holding wool in store pending a later sale (defer selling). Alternatively, they can sell part of the clip (split selling) and defer the remainder to a time of lower supply. Woolgrowers are best to work closely with their wool broker or advisor and be aware of storage costs and the time value of money.
The more commonly used methods include:
- Open-cry auction – the most common method of sale, accounting for about 90% of Australian wool production. This system is facilitated and managed by wool brokers, guarantees payment, and allows maximum exposure and competition for wool at sale time, with all major buyers of Australian wool present in the auction rooms.
- Private treaty – prices are negotiated privately with buyers at or about the time of shearing. Wool may be sold either tested or untested, however, untested wools will not be paid the same as tested wools.
- Forward sales – a contract is made before shearing to deliver wool to an agreed specification and to an agreed price schedule. Payment is made against the actual test results. Remember that once contracted, wool must meet specifications.
- Direct to topmaker/exporter – a spot sale through an exporter for delivery direct to a topmaker. Negotiation of the final price in Australian currency must be managed carefully to eliminate fluctuations in currency exchange rates.
- Online selling – electronic offer board where wool is available for sale to buyers 24 hours a day, seven days a week. A reserve price is ‘posted’ (presented for sale on computer screen) and can be simultaneously seen by all registered buyers. Submission of bids and final sale is facilitated via the offer board, and not directly with the seller. The most significant advantage of an electronic offer board comes in a rising market, when it allows buyers to purchase wool lots outside the scheduled auctions.
- Grower marketing groups – grower-based marketing groups established to sell direct to processors and manufacturers. Grower marketing groups need a structure, training and a sound business case to succeed and be profitable over time.
- Wool pools – A contract is made to deliver a volume of a shearing or yearly production to the pool up to 12 months prior to shearing. By participating in the pool woolgrowers are assigning the risk management of their wool portfolio to a third party. The aim is to reduce exposure to price volatility. An upfront payment occurs after delivery based on a percentage of the current market. At the close of the pool a final payment is made based on the performance of the pool against the physical market. This option also includes traceability, downstream education and opportunities for contact with end-use customers.
- Grid sales – similar to selling livestock ‘over the hooks’, prices are offered from a set grid of prices for wool delivered to store. Prices are generated from all stages of the demand chain as the various businesses feed direct orders from the pipeline. Most wool selling brokers will offer some form of grid sales or a price at door pricing system for their clients.
- Partnership processing (retained ownership) – some processors offer an option to growers allowing the grower to retain ownership of the wool beyond the greasy form. By using downstream manufacturers infrastructure, a grower can participate in the value add of wool from top to yarn to garment. This partnership results in a sharing of the profit as wool is transformed into retail products.
Valuing the wool clip
Wool brokers are the best source of pricing information via their appraisal. Brokers’ appraisals incorporate a visual inspection of a woolgrower’s wool in the sample box, anticipated market movements and the quantity of offerings in the forward weeks to provide an estimate of what their wool will achieve at auction.
Make a plan early
Woolgrowers should plan their selling system 4–6 months before shearing commences. The final choice will be determined by a number of factors including:
- short- to medium-term market outlook and projected price trends
- estimates of the value of the wool using information from valuations and forward markets
- prices on offer relative to that valuation and expected price trends
- estimates of selling and possible storage costs
- the woolgrower’s financial circumstances, including cost of production (COP)
- potential risks of market volatility and their approach to managing price risks.
Woolgrowers are advised to monitor market conditions and review approaches to selling regularly.
Managing price volatility
The profitability of a wool enterprise is determined by a combination of seasonal conditions, personal management programs, and wool price cycles. Wool prices, like all commodity prices, move in cycles, as shown below.
Figure 2.1 – Commodity price cycles in key wool markets over 15 years (Source: The Woolmark Company)
A market focus will help maximise the net return hectare from your wool.
Price risk management programs and products can help protect enterprise profitability from volatile commodity prices and the vagaries of the weather.
Wool brokers and advisors can access a wide variety of price risk management tools around the world to help reduce the uncertainty of future cash flows. It is important to seek professional advice to understand the practicalities and implications when developing strategies to manage price risk. Options include:
- making use of forward selling or hedging options such as selling wool futures before shearing
- accessing price risk management tools through a wool agent or exporter. This eliminates most of the risk of price fluctuation, but production and wool quality risk remains
- exploring fixed price wool indicator contracts, wool minimum price facility, and deferred price contracts.
Some on-farm approaches to managing the current market situation and possibility of price volatility at the time of sale include:
- spreading the risk by offering the clip over more than one scheduled sale
- setting well researched and realistic reserves to protect against downside risk of price fluctuations and maintain flexibility up to the time of sale.
Holding wool in storage requires an assessment of the likely storage costs and financial impact of a delay in wool sales against the potential for price gains when wool is finally sold.