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Falling off the sheep's back: Why Australia can't capitalise on record wool prices

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Reuters SYDNEY

By Jonathan Barrett and Colin Packham

SYDNEY (Reuters) - Sheep farmers in rural Australia waited more than half a century for wool prices to come roaring back, only to find there aren't enough shearers to trim their golden fleeces.

"Once upon a time you could go down to the local pub and arrange for some fellas to come in and start almost immediately - those days are gone," said Alan Rae, a wool producer in Bungunya, a town of about 200 people in Queensland state.

The industry shackles mean suppliers in Australia, which provides about 90 percent of the world's exported fine-wool used in clothing manufacturing, are struggling to meet demand. That has forced some garment makers to sell at a loss or reduce their wool content.

 

Prices for very fine wool used for clothing hit a record high A$18.30 kg this week, thanks in large part to ferocious demand from Chinese garment makers.

That's more than three times the price during the early 1990s when a massive oversupply led the government to offer indebted farmers A$2 for every sheep they shot.

The high prices coincide with the peak shearing season in some parts of Australia, but some in the industry think things are as good as they will get.

"My concern for the future of the market is how opaque the Chinese market is," said Phin Ziebell, an agribusiness economist at National Australia Bank, who expects prices to fall to around A$16 kg by the end of the year.

"It was chilly today so I put on my A$50 ($40) Uniqlo jumper, which is super-fine Merino wool. I can't see how that product can be manufactured at the price levels we have today."

SIGNS OF STANDOFF

There are early signs of a stand-off between buyers and sellers emerging at wool auction houses, according to the country's dominant wool storage and export house AWH. Weekly pass-in-rates have topped 10 percent in some states, double usual levels.

"Some of the sellers are putting too high a reserve on their wool and the buyers are obviously trying to keep the rate down," said AWH chief executive Michael Jones.

Those who can shift their wool are still making hay. Unlike most agricultural commodities, wool can hold its value for many years if properly stored.

"We had some wool that had been sitting here for 14 years," said Jones. "It's high value wool that farmers had put in and it was like their (pension) fund, sitting there paying a low storage rate. Even that is now being cleaned out."

Australia famously "rode to prosperity on the sheep's back" during the 20th century, fine tuning Merino breeds to produce a soft, durable and natural fibre popular in Europe.

That demand has now extended to Asia, and China in particular.

But high wool prices are having an impact on clothing makers, according to woolgrower body Australian Wool Innovation (AWI).

"There are those selling fine wool products as loss-leaders and others blending down, but we also have people putting wool into their garments for the first time replacing synthetic materials," said AWI chief executive Stuart McCullough.

While prices remain susceptible to a China-led pullback, there is less danger of over-supply.

Flock increases in China, which in 2016 surpassed Australia as the top wool producer, are expected to pressure coarse wool prices, according to Australia's chief commodity forecaster ABARES, but not significantly impact fine wool prices in the medium term.

Australia's wool output is set to grow just 1.4 percent over the next 12 months, ABARES said, despite record prices.

Australia's modest growth is still expected to outpace global competitors, according to industry body International Wool Textile Organisation. It expects world-wide wool output to increase 0.5 percent this year amid unfavourable weather conditions in competitors Argentina and South Africa.

New Zealand production is also forecast to be stagnant as farmers cull sheep and lambs to capitalise on high meat prices, according to ABARES.

Meanwhile, Australia's sheep count is at 70.4 million, representing the fourth lowest level on record.

That is still well under half the flock in the early 1990s, when Australian sheep numbers soared under a government-backed reserve price scheme that proved unsustainable.

Now, beef prices are high so cattle farmers are not switching, while grain farmers that previously had sheep have lost the fences and shearing sheds they need to return to livestock, let alone the shearing labour.

TOO HOT AND TOO HARD

"We should have been prepared for it because this has been talked heavily for the last five years, the shearing shortage," said shearing contractor Emma Morvell, whose company has had to turn down work.

"The guys have been seven days a week since mid-October and we've just about burnt them out."

Sheep farmers are responding by shearing outside of traditional peak seasons but the problem remains a lack of workers entering the back-breaking industry.

Most shearers in Australia are paid a standard rate of just over A$3 per sheep, which adds up for top-performing shearers who can get through more than 200 fine wool sheep a day.

But downsides include long, hard hours in old shearing sheds during Australia's hot summers, where the temperatures regularly exceed 40 degree Celsius (104°F).

"I can't imagine any vocation tougher," said AWI's McCullough.

"There has been a very vibrant resources sector so it was easy for many young guys to say, 'I'll just go work on the mines where the money is just as good and conditions are a lot easier'."

($1 = 1.2770 Australian dollars)

(Reporting by Jonathan Barrett and Colin Packham in SYDNEY; Editing by Lincoln Feast)

Disclaimer: No Business Standard Journalist was involved in creation of this content

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First Published: Mar 09 2018 | 2:16 PM IST

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