What can we learn from past wool price downturns?

COVID-19's grasp on wool market not the worst in history

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The current wool price downturn isn't the worst, or even the second, third or fourth-worst, in the last 100 years.

The current wool price downturn isn't the worst, or even the second, third or fourth-worst, in the last 100 years.

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The current wool price downturn isn't the worst, or even the second, third or fourth-worst, in the last 100 years.

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Merino prices are currently down a hefty 60 per cent on 2019 levels, yet surprisingly the market's significant downturn as a result of COVID-19 isn't the biggest in the last 100 years.

Research conducted by Independent Commodity Services market analyst Andrew Woods, which was published in Mecardo, found there were four other historic events that resulted in more dramatic wool market declines in the last century than the current one.

In 1921, following the Spanish Flu, prices plummeted by 75pc, and in 1955, a 75pc price correction occurred after the short-lived Korean War wool boom.

The infamous reserve price scheme collapse resulted in prices falling by 69pc in 1975 and 73pc in 1991-1993.

Mr Woods said these examples meant there was precedent for further price declines in the next couple of quarters if demand did not improve.

But he said on a positive note, most of the downturn had already occurred for the cycle so now the uncertainty revolved around time and how long it would take for prices to start picking up.

In elaborating on this research, Mecardo managing director Robert Herrmann said the difference between now and those events was that wool production was currently at century-low levels.

"Over that period, we've been producing the least amount of wool and demand is growing, so when that consumer confidence returns, we could see quite a significant rebound in wool price," Mr Herrmann said.

"Based on the last 50 years, when that rally happens, it's retraced 100pc of the fall, so that provides some hope and optimism."

With that, he said the next question, and perhaps the hardest to answer, was when this would occur.

"Wool is a discretionary spend, it relies on consumer confidence and that's all related to shops opening and people being happy to spend," he said.

"It's worth noting that when the Global Financial Crisis hit, it crept up on us, getting worse every week, yet with COVID-19, it was a bit more like falling off a cliff, so the prediction is consumer confidence will recover quickly because like all these things, what goes down quickly has the potential go up quickly."

He said part of the rationale behind this was that every country and government in the world was doing all they could to stimulate the economy post-pandemic.

"When we get through the overbearing influence of COVID-19, whenever that might happen, say it's through a vaccine, all that stimulus is predicted to rebuild confidence strongly," he said.

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Mr Herrmann said the caveat to all of this was the 350,000 bales sitting in brokers' stores.

"And we're accumulating more wool in stores every week as our sales aren't matching our receivals," he said.

"This overhang has to be absorbed when the recovery comes."

He said in the last decade, the market had had an appetite to purchase around two million bales from Australia a year.

"We know that production is down so we're not going to produce two million but if we add stocks, by the middle of next year, we could get to 2.4-2.5 million bales of available wool," he said.

"And that's going to be a challenge even though consumer confidence might be up."

He said avoiding this was dependent on the market recovering sooner rather than later.

"Let's just say the market gets to a stage by Christmas where it's improved a bit and farmers are happy to sell, that means bales won't continue to stock up at the rates we've seen in the last six months," he said.

"Then the stocks we have coming won't have as significant of a resistance to price."

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The story What can we learn from past wool price downturns? first appeared on Farm Online.

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