SYDNEY — The Australian wool industry closed 2007 with bittersweet news for wool growers and their customers: U.S. prices hit a 17-year high, but production levels fell to their lowest in 61 years.

The Australian Eastern Market Indicator, the index for international wool prices, closed 2007 above 10 Australian dollars a kilogram for the first time in five years. While that represents a 19 percent surge in wool prices over the past year in Australian dollar terms, it equates to a 25 percent price surge in U.S. pricing. On Monday, $1 was worth 1.15 Australian dollars.

Australian wool growers are “reasonably happy” with the prices they are getting, according to Chris Wilcox, chief economist at Woolmark. However, the primary driver of the increase has been a drought that has persisted for more than five years in some areas of the country and is taking a heavy toll on the Australian economy. The drought has cut agricultural production across the board, with farm export earnings forecast to fall by more than 3 percent to 26.8 billion Australian dollars, or $23.2 billion at current exchange, in 2008, according to the Australian Bureau of Agricultural & Resource Economics, or ABARE.

“[The price surge] is due to still pretty solid demand but, in particular, concerns by processors around the world about the supply situation coming from Australia,” said Wilcox. “Twelve months ago, wool production from Australia was sitting at about 425 million kilograms greasy and the current forecast for this season is 395 million kilograms. So, we’re down by about 30 million kilograms, or about 8 percent. That’s due entirely to the drought. Both are due to slightly lower fleece weights for the sheep, but in particular there have been growers who have sold off their flocks in the face of the drought and the high feed grain prices.”

Production levels are the lowest they have been since 1946, said Wilcox.

Australia exports 65 percent of its wool clip to China, accounting for 70 percent of China’s total wool imports. Last month, Chinese business news wire Sinocast reported the China National Textile & Apparel Council believes “flying” international wool prices are impeding the development of the Chinese wool textile industry. Wool import prices averaged 5,622 Australian dollars, or $4,864, a ton from January to October, up 25.5 percent from the previous year, according to Sinocast. Prices of Australian wool reached 7,146 Australian dollars, or $6,182, a ton over the same period, up 35.67 percent.

This story first appeared in the January 8, 2008 issue of WWD.  Subscribe Today.

“There may be some negative reaction with price levels the way they are, particularly when you’re competing with cotton and synthetic fibers,” said Wilcox. “And there has to be some substitutions. But even so, I can see the price levels being maintained at these kind of levels for several months yet.”

Prices have not been the only cause of recent angst between China and Australia. In July, the Chinese Ministry of Finance & Commerce caused tremors in the textile trade by announcing that its 2007 tariff-rate quota for wool was fully allocated. In October, following protracted negotiations between Australian wool and government authorities and the Chinese government, the Chinese finance ministry said that nation’s wool import quota amounts for 2008 would remain unchanged at 287 million kilograms for raw wool.

Wool has nevertheless emerged as Australia’s second largest agricultural export. According to ABARE’s 2007 Australian Commodity Statistics, Australia exported 3.07 billion Australian dollars worth of wool, overtaking wine, dairy and wheat for the year.

“This represents an increase of 525 million [Australian dollars] from the previous year, defying both the drought and the high Australian dollar,” Don Hamblin, WoolProducers’ Australia president, said in a statement. “There is a very clear message here for growers. There is still value in merinos.”

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