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Tuesday, January 13, 2015

Riemann wool forwards in 2014 – worth a hedge?

By Augusto Semmelroth  |  Source: Riemann, AWEX

Key points

  • Riemann Wool forward trades fell sharply in 2014 on the back of reduced price volatility on the physical market and lack of clear direction for the market going forward.
  • 21MPG contracts the most traded product despite the surge in fine wool production in 2014.
  • Interest for crossbred forward contracts higher in the last few months of 2014 following a price rally in the physical market.
  • Most producers who hedged part of their 2014 output saw a tangible benefit. 

2015-01-12 Riemann Forwards In 2014 FIG 1

2015-01-12 Riemann Forwards In 2014 FIG 2

The volume of wool sold forward only represents a minor fraction of the annual throughput. However, the amount of wool traded on Riemann in 2012 and 2013 reached respectable levels of 4.96 and 3.28 million kg clean, respectively. In 2014, trade activity tumbled to see volumes falling 85.4% year-on-year to only 477,500 kg clean. Yet, for producers who decided to take some cover, the results were positive.

Figure 1 shows the monthly trades by wool type on the Riemann Forward market in 2014. As in previous years, the 21MPG contract secured its position as the most traded contract, accounting for 74% of all traded volume. Despite the increased production of fine wools in 2014, most fine wool producers continued to opt for the 21MPG forward contract to hedge their clip as the pricing for the 18.5 and 19.5MPG contracts was notably less attractive.

Aside from the usual interest for 21 micron contracts, the last few months of 2014 saw a revival in the trade of 28 and 30MPG contracts. As crossbred wool prices continued to trend higher, buyers became increasingly interested in taking some cover for late 2014 and early 2015 deliveries. As a result, 55,500 and 66,000 kg clean, respectively, of 28 and 30MPG contracts were traded.

Although the amount of wool traded in 2014 fell short of 500,000 kg clean, an excess of 900,000 kg clean were settled during the year as many positions had already been taken earlier in 2013. By and large, producers who decided to price part of their 2014 clip saw a tangible benefit in pursuing a hedging strategy.

Figure 2 shows the price range, and average price, for 21MPG contracts, as well as the settlement price for each maturity. At the top of the range, contracts were traded at around 1270-80¢/kg clean with settlements between January and July, before easing to 1200¢/kg clean in spring/summer. At the lower end of the scale, prices varied largely between 1100 and 1150¢/kg cwt for most months.

Taking the average traded price as a benchmark to represent an ‘average hedge outcome’, in 11 out of 12 months sellers received an extra 15-94¢/kg clean, or roughly 2-8%, above the physical market rate. For producers selling at the top of the range, proceeds were lifted by up to 100¢, or 13%. On the other side of the ledger, trades executed at the bottom of the range settled up to 9.5% below physical rates. Yet, these were vastly the exceptions. 

What does this mean?

After two years of sizeable volumes being traded on Riemann Wool, numbers dropped substantially in 2014. To put this trend into context, in 2012 roughly 2.5% of the total Australian wool production was sold forward through Riemann. In 2013, that dropped to 1.8% before moving to only 0.3% in 2014.

The main difference between 2014 and previous years was the lower price volatility seen throughout the year. While wool prices still fluctuated within a wide range between 2011 and 2013, markets stabilised somewhat in 2014.

With prices steadying and markets lacking direction, both buyers and sellers preferred to take a ‘wait-and-see’ approach until clearer demand signals emerged. On the one hand, producers were expecting prices to return to 2012-13 levels. On the other, buyers took a more cautious approach and restricted their bidding to ‘safe’ levels. As a result, restricted trade activity was observed.

That said, even in years of restricted price movements, sound opportunities to hedge future production appear at different times. Having a Good ‘Til Cancelled (GTC) sell order in place, at a desired target level, is always good strategy to take advantage of those opportunities when they appear.   

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 


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