SYDNEY — The news that severe drought conditions could contribute to Australia’s lowest level of wool production in 50 years has driven up prices sharply in Australian wool auctions.

Following the Sept. 23 release of Australian Wool Innovation’s latest production forecast — which predicted an 11 percent decline in shorn-wool production to 495 million kilograms of greasy wool for the 2002-2003 season, potentially the lowest production level since the 1950-51 production year — buyers scrambling to secure stocks pushed the Australian Eastern Market Indicator benchmark index up Australian $1.62 last week, or 17 percent, its largest week-on-week price increase on record. It closed at $11.41 per kilogram of clean wool.

Dirty wool is the fiber in its just-shorn state. After the naturally occurring lanolin is removed, the fiber is called clean wool. The cleaning process reduces the weight of the wool by about 38 percent.

"It continues the kind of almost panic buying that we saw last week as wool processors and traders scrambled to secure supplies," said Chris Wilcox, chief economist with the Woolmark Co. "The combination of very low supply and soft demand, as we’re seeing around the world with difficult retail conditions, is a recipe for volatility. It’s anybody’s guess as to what could happen from here."

Ross Bawden, national wool manager for Australia’s second-largest wool broker, Wesfarmers Landmark, said: "We knew that the tightening supply was going to give some buoyancy to prices, but we’ve never seen it lift like that before." He reported strong interest from Chinese and western European buyers.

China is Australia’s biggest customer for raw wool and tops, accounting for just under 40 percent of Australian wool exports, according to Woolmark.

"There’s always a danger, with a sudden spike like this, that prices could ease suddenly as well. This is not really a boom caused by genuine consumer demand, it’s a boom driven by the processing chain. The longer term is a question mark — is it sustainable at these levels, given the price relativity to other fibers?" Bawden asked.

According to the Australian Bureau of Meteorology, severe rainfall deficiencies currently affect most Australian states, with southeastern Australia, in particular, experiencing one of its worst dry spells on record.Some areas have not seen rain for almost two years. Thirty-eight percent of Australia’s wool production comes from New South Wales, and 86 percent of that territory is now officially in a drought, according to the NSW Department of Agriculture — with another 12 percent assessed as marginal.

Drought conditions have compounded a number of problems in Australia’s wool supply chain. Supply is also down because of the completion of the sale of Australia’s 4.8-million-bale government-maintained wool stockpile in August 2001 and falling sheep flock numbers, with many farmers moving out of wool in the past six years and into more lucrative areas, such as horticulture and sheep meat production.

"We’re really seeing a watershed moment for the Australian wool industry," said Deborah Perkins, senior manager of agri-business consulting and research for Rabobank Australia, which is predicting firmer prices in not only fine micron, but also broader micron wools. "It’s the first time in 10 years that we haven’t had that stockpile there, so buyers and sellers are really now trading in a free market. The drought is just exacerbating things."

According to Woolmark data, Australia produces 30 percent of the world’s total wool supply, 50 percent of the world’s apparel wool supply and 75 percent of the wool that is traded internationally.

The low current value of the Australian dollar has somewhat cushioned the blow for Australia’s major customers. Woolmark’s Chris Wilcox pointed out: "In Australian dollars it’s a 13-year high, but in U.S. dollar terms it’s only back to the levels of 1995."

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