Saturday, March 30, 2024

Wool’s history of boom and bust here to stay

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Wool bales

I’m an avid follower of the brilliantly named Episode 3. If you don’t know who I’m talking about you need to look them up but to save you the effort here’s their speel off their web site.

Andrew Whitelaw and Matt Dalgleish, the founders of EP3, began working together in commodity market analysis in 2016 at an agriculture analysis firm owned and operated by Ruralco, a listed Australian company. In 2019, Ruralco was acquired by Agrium Australia (formerly known as Landmark), a wholly owned subsidiary of Canadian agribusiness, Nutrien.

In 2020 Andrew and Matt decided to leave Nutrien to form a new food and agriculture analysis business known as Thomas Elder Markets (TEM), with the support of Elders Rural Services, a listed Australian company.

In 2022, Andrew and Matt took over the ownership of TEM, rebranding the business and relaunching as Episode 3 (EP3).

These guys are probably some of the best agricultural commodity market analyists in the world and they provide a free weekly service which all Australian farmers should get in their in box plus have on their pod cast feed.

The only negative is neither of them can sing but you have to listen to their pod casts to appreciate how bad they sound.
Putting their singing aside, their market analysis is second to none and if nothing else challenges readers/listeners to actually think about what the market is telling us.

A recent one they did on the wool market (19 May 2023), got me thinking about wool, which seems to be staggering around and yet again threatening to repeat its long term boom and bust cycle, despite what we are repeatedly told about the huge demand for clean green natural fibres.

A brief history lesson of wool prices for those not deep into economic history.

Australian wool is no stranger to the commodity cycle having gone through at least six major cycles over the past 140 years, from the boom of the 1880s which led to oversupply and price crash during the 1890s centenary drought, repeated again with the price boom of the roaring 20s, followed by the depression price collapse and the post war upswing culminating in the Korean war price spike of a pound for a pound ($60 kg greasy today) which again collapsed, there was a mini boom in the mid 60s followed by yet another collapse. This led to the creation of the reserve price scheme introduced in 1970 to help protect farmers against what was termed ‘potholes’ in price levels.

The price of wool in 1970 was 113.4 clkg, some sixty percent of the price received four years earlier, and by far the lowest price since the end of the Second World War. The reserve price improved confidence and was followed by the boom in 73 linked to the rise of the price of oil pushing up the cost of synthetics, but that boom came to an end with the inflation that followed.

The reserve price scheme, that was cheered on by New Zealand and Argentinian farmers who did not have to pick up the interest tab, collapsed when inevitably the government pulled the plug on the growing stockpile which exploded between 1989 and 1991 when the reserve was lifted to 870c in 1987 leaving a long hangover of 4.7 million bales and a storage bill of $3milion a day for the industry to deal with over the next decade.

And now the most recent price spike in 2018 driven by the growing Chinese economy which has now well and truly fallen in on itself.

On average, every price boom is followed by a 60 per cent market price collapse, as the market responds to higher prices by walking away from what is a luxury product and seeks out cheaper alternatives. The same cycle can be found in other Australian luxury products, be it pearls, wine or even wood (Sandalwood) or in fact most of the minerals as they all go through a regular cycle of up and down.

The only product to defy this boom bust cycle that I can think of is diamonds, that is until the last three decades as the market had been tightly controlled by De Beers holding up to 90 per cent of all sales until Argyle Diamond mine came on line.

Like the wool reserve price scheme, De Beers attempted to defy economic reality and started buying up diamonds to prop up the price but this collapsed in 1996 signalling the beginning of the end of over a hundred years of controlled marketing.

The final nail in the coffin was a US class action in 2012 which destroyed the last vestiges of the monopoly leading to diamonds like wool being seen as just another product; good for the consumer not so good to be the producer.

Still, wool growers have to be the ultimate optimists as those families that remained in the game over the decades have built farms literally off the sheep’s back, but I wonder if it will continue into the future.

This year it’s been 32 years since deregulation and production has collapsed 5 fold in volume from over 250,000 tns to not much more than 50,000 tns today as sheep numbers have fallen from 180 million to today’s around 80 million. Adding to the pressure on wool has been the mix to sheep meat lambs and the steady wind down of the live export market that gave a home to older sheep held back for their wool.

The decline in sheep is only likely to increase as a result of the recent collapse in sheep prices, the threat of the axe hanging over the live export market, the cost and availability of labour and the relentless campaigns by the animal activists to end any form of livestock production.

For an industry that looked like it had turned the corner in 2018 and was here to stay, built on the back of the booming Chinese market and the supposed growing demand for all things clean and green, it has been a huge step backward to end up where we are today.

So much for the promise back in the 1980s when the first signs of a emerging market in China kicked off discussion around the sale yards of the future of the industry if every Chinaman brought just one pair of woolen socks.

Unfortunately they were too slow to save the reserve price scheme and today a billion Chinese with just one phone in their pocket worth a hundred pairs of woolen socks still have not decided that wool is a must have fibre.

When it comes to luxury Australian products, it seems the Chinese were more interested in using their phones to order rock lobster, pearls, and red wine than socks.

So what about all the Europeans and Americans who are into fashion? Why has all the millions, if not billions, funnelled into marketing this unique fibre not been converted into a solid market that is not prone to endless rounds of boom and bust?

In this era of clean green organic and natural, one would think the young progressive hip green voter who is against live exports and all for giving up something else to address the climate emergency would be marching out at the next rally in favour of the Voice in all wool apparel.

Unfortunately, these inner city types that demand more renewables then demand subsidies for the soaring price of energy, seem to stick to synthetics produced by the evil oil giants and sweat shops in Bangladesh rather than woolen garments.

But, putting aside my point scoring against those who support progressive causes, let me go back to Episode 3 and what they triggered in my thinking of the wool price.

As their article states, “At the current prices buyers are hard to find,” as they say nothing ends high prices like high prices, something the wool industry knows all too well.

How do we break away from being a fibre to being something the market truly values, something that will hold its value and hold up the wool price?

No doubt better minds than mine have been working on this for decades with the help of your wool levies but I wonder if maybe we will never convince the young and the hip to value wool.

If they refuse to change their buying behaviour to save the planet by consuming less, flying less or driving less, then why would they change their behaviour to consume more wool even if it is a natural product?

If the billion Chinese have shown no interest in buying two billion socks and the progressive types across the West who agonise about climate change but refuse to accept nuclear energy as an option or a massive increase in the cost of energy, then maybe the market is never going to be there to take wool away from the boom bust cycle.

The day the green left voter bypasses the BP servo to pull into a Clean Green filling station to pay $4 a litre for biofuel made from carbon neutral canola, or selects the power company that only sources renewables and green hydrogen at double the cost of a traditional coal gas provider is the day the Australian wool market will have moved on from the boom bust cycle.

As, unless the western consumer is prepared to recognise that wool really is something special and worth paying for, it will always be part of the commodity cycle.

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