|Retail Wool Demand Looks Promising
(May 1, 2006) Woolmark recently reported a renewed optimism about private consumption growth in key wool retail markets such as the United States, Japan, South Korea and Italy (Woolmark, 3/24/06). The current prospect for growth follows a few years of lackluster performance and if realized, can help strengthen wool prices.
In the United States, January import figures confirm early consumption strength for wool products. Imports of men's wool suits and wool carpets were up 22 percent and 8 percent, respectively, year-to-year (Woolmark, 3/06).
For raw and semi-processed wool, China remains a strong importer. In January 2006, imports were up 31 percent and its wool apparel and textile exports were up by 12 percent by volume, year-to-year (Woolmark, 3/24/06).
With Australian and New Zealand wool exports strong and price gains seen in early 2006, the price dampening witnessed in March is thought to be temporary as there appears to be strong signs of retail demand strength, as well as a significant amount of wool in the pipeline.
In the United States, the wool season started slowly with delays from rain and snow in the West. An early sale at Roswell consisted of more than half of 2003-season to 2005-season wools. There was some shearing activity in the Territory States in March relative to February. However, wool trade was minimal in Texas and New Mexico during most of March, although it did pick up during the last week of the month for finer wools. Recent price volatility in Australia may have made buyers in the United States hesitant to make offers before more stable prices were established (U.S. Department of Agriculture's Agricultural Marketing Service, 3/24/06).
In the Fleece States, 21-micron to 26-micron wool held steady between February and March. Twenty-eight micron gained 5 percent to average $0.95/lb. clean in March and 30 micron to 34 micron fell 6 percent to $0.77/lb. clean. In the Territory States, 23-micron wool fell 5 percent to $1.53/lb., 26 micron fell 15 percent to $1.10/lb., 28-micron wool jumped 11 percent to $0.75/lb. and 30-micron to 34-micron wool rose 2 percent to $0.69/lb.
Some reports out of Australia suggested that producers are turning away from wool production and into lamb production due to the relative profitability of lamb. However, farm budgets revealed that Merino enterprises are as profitable as competiting enterprises, even in the past two years of low wool prices and relatively high lamb prices. The analysis confirmed the "key profit drivers for Merino wool enterprises were stocking rate, fleece value per head, wool cut per hectare and time of lambing," (Australian Wool Innovation Limited reprinted from ASI Weekly, 3/31/06).
As the lamb and wool industries have proven, the relationship between exchange rates and trade flows is often complicated and does not necessarily follow textbook definitions. Toward the end of March, the Australian and New Zealand dollars became weaker against the U.S. dollar. Since January, the U.S./Australian rate dropped 3.2 percent and the U.S./New Zealand rate fell nearly 8 percent.
The overall relative weakening of the U.S. dollar makes lamb and wool imports to the United States relatively more expensive and wool exports relatively more competitive (cheaper) on world markets.
"From recent highs – reached in mid-2001 or early 2002 – the dollar has dropped 38-percent against the euro, 23-percent against the yen and 25-percent against the Canadian dollar. And most economists expect the slide to continue," (MSNBC.com, 3/21/06).
However, as we have seen with lamb imports, importers may be willing to reduce margins and keep prices stable in order to maintain market shares. Imports continued to increase in light of the weak U.S. dollar. The unpredictable price movement in the Australian and New Zealand wool markets in March is also a testament of the volatility of markets and uncertain susceptibility to relative exchange rates.