This week The Country's Jamie Mackay is joined by PGG Wrightson's Grant Edwards to look at the wool market this month.
There was a bounce in the market yesterday due to a sale in Christchurch, which offered over 10,000 bales, Edwards said.
As well as this, merino and fine wools were up around 10 per cent, and crossbred up around 5 per cent, Edwards said.
There was some normalisation coming to the wool market, said Edwards, who gave the example of India, which had doubled its export quantities in the crossbred space from 9 per cent to 18.7 per cent throughout July.
Mackay asked about the shortage of shearers this season, as there would be no one coming in from overseas due to Covid-19 restrictions.
Edwards said this was a concern for the industry and there had been lobbying of government to help with the situation.
Mackay also asked if farmers would move to a once a year shearing model, due to the cost of shearing.
Edwards was not anticipating this shift, due to a few reasons, such as animal welfare and the climate and geography of New Zealand.
In 2012 after a period of severe strong wool price volatility where growers and International manufacturers saw New Zealand wool prices soar to around $6.70/Kg Clean, then watched as it declined by 50% within 2 years. It was frustrating and debilitating for everyone involved in the wool supply chain.
PGG Wrightson’s international sales & marketing business Bloch & Behrens at the time was challenged by some of its international customers to come up with a way to combat this volatility.
This provided the mandate for Palle Petersen, General Manager of Bloch & Behrens to come up with the concept of a ‘3 Year Flexi-Contract’, an innovative wool product designed to reduce the impact of the volatile spot market for both growers and International manufacturers.
“Manufacturers needed to commit to purchasing wool up to 3 years forward, and they could do this without having to lock into a fixed price. As the name suggests the flexi-price enables some upsides or downsides but not to the extent of what had happened in 2010-2012 as the world came out of the Global Financial Crisis in 2008”, says Palle.
“We can only offer this type of contract with our premium international customers who we know and trust and have been working with for many years. As we navigate our way through the current Covid crisis this product will once again help smooth any potential future volatility”.
Since inception, the '3 Year Flexi-Contract' has facilitated the sale and purchase of approx. 5million kilograms of New Zealand strong wool between growers and international manufacturers.
“This resulting export revenue for New Zealand can be quantified at approx. NZD20m, which is a very pleasing figure for this one sales platform”, adds Palle.
“The most satisfying aspect has been the fact that in the last five years PGG Wrightson Wool has paid around $2m of premiums directly to New Zealand strong wool growers over and above the spot market.”
The pricing mechanism we use is transparent and quite straight forward, says Palle. “We have a moving average on a specific wool type as the baseline, and then adjust the price accordingly when the underlying wool is delivered which can be better or worse than the baseline wool type”.
The benefit of this product to New Zealand strong wool growers has been well received and having the strength of PGG Wrightson behind these grower contracts is a win-win for growers. As the price is based on a 3-year moving average, the curves at some point will crossover at which time the international manufacturers will enjoy some benefit like growers have done for the last 5 years.
At time of writing the flexi contract is paying growers $2.84/Kg Clean compared to the current spot market price of $1.82/Kg.