Wool Prices Soar as Retailers Look Toward Consumer Reaction

Becky Talley
Sheep Industry News Asssociate Editor

(October 1, 2011)  The price of wool is climbing ever higher. 

Falling supply and rising demand have left apparel companies scrambling for scarce wool stocks, with prices for wool producers rising fast as a result.
For U.S. producers, most of the wool this year has already been sold, so what happens in the market today won’t necessarily predict what will happen in January when the shearing season starts again.

Global wool production has been in long-term decline for many years, with output currently at its lowest level for nearly a century as cheaper synthetic materials have steadily eroded its market share. But the dual effect of natural disasters and the fast-growing Asian economies have left companies scrabbling around for scarce wool stocks, with prices rising fast as a result.

Australia’s, the world’s largest wool-producing nation, production was impacted by floods in Queensland and Victoria earlier this year, leading to a doubling in the prices of wool in 12 months, with broker inventories slashed to nearly nothing.

It’s a similar story across New Zealand, where even a surge in the value of the New Zealand dollar has failed to stop price rises. The United Kingdom industry has seen prices hit a 25-year high, boosted by rising demand for expensive wool suits in emerging markets like China and India. 

“China’s economy continues to boom. Now 60 percent of the wool that goes there stays there. I don’t see China changing, the demand will continue to grow,” says Barry Savage, ASI’s international wool consultant.

In addition, the re-entrance of Europe into the market, which has been a strong market as their currency has stayed relatively strong, has been a driving force in wool prices as well. According to Savage, the Italians have had a particular impact as the desire to better control quality and the timing of delivery have seen famous brands move production back to Italy.

Retail Waits for Results
Companies with a broad international footprint will be well-positioned to take advantage of this booming demand, with tough conditions in traditional markets like the United Kingdom and United States offset by profitable emerging destinations in the Asian Pacific region, while others that sell to post-recession countries may have a tougher time as retail prices rise.

“I have been telling everyone that I expect the prices for raw materials to come up,” says Savage, adding that it is not just the price of wool that is rising, but almost all raw materials, including cotton, have had a steep rise.

“It was a two-edged sword – the perceived lack of supply and the weak U.S. currency caused something of a double dip for manufacturers,” relates Dan Gutzman, wool department manager for Pendleton Woolen Mills.

Domestically, many retailers are waiting for the 2012 season coming up to see how retailers will react to possible rising prices for wool products, says Gutzman. 
“An awful lot of what we are producing for stores this fall would not have had the higher prices. For us and other manufacturers in the U.S., those increases won’t probably hit until spring,” he relates.

Gutzman relates that those companies that have more niche retail products may not be as affected by increased wool product prices, as often consumers in that sector consider price to be lower on the list of importance. However, the big-box type companies, whose customers who rank price as top of their criteria when buying products, may see some decrease in sales.

“A lot will play on how the U.S. economy goes, how the U.S. stock market goes. Typically textile and apparel are what people first pull from their budget, and one of the first things they put back in their budgets when the economy gets better. If the economy stays on track, we are relatively confident 2012 will be ok,” says Gutzman.

Supply a Huge Factor
Australia’s market opened at 10-percent down in U.S. dollars, according to Gutzman, but those prices he says are often due to the opening markets being flat, currency rates and the fact that much of Europe and Asian countries are on holiday this time of year. It has since risen.

Currency and supply will continue to play a large factor to where the prices will go from here.

In Australia, farmers are already reacting by shearing earlier in the year, with the Australian Wool Production Forecasting Committee lifting its forecast for shorn wool production in 2010/2011 to 340m kg. 

But the increase, compared to the 335m kg prediction of last December, is a tiny one and not expected to make a material difference to supplies or prices. Next year doesn’t look much different, as Australia’s wool production is currently expected to increase by only 1 percent in 2011/2012 to 345m kg – so the situation is unlikely to get any easier in the near term.

 “Australia will do nothing to change the supply situation, Uruguay is down. We are not talking any substantial change in the next year for the amount of wool available,” Savage says.

Gutzman agrees,“Just on a strictly supply and demand economic basis, there is still not quite enough supply, even though economic conditions might want to hold the price down, prices will stay high,” he relates.

 “I think until January, we are all going to be sitting and watching where it goes domestically,” adds Gutzman.

Reprinted in part from just-style.com

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