The great wool price rise mystery

Press, Volume CXII, Issue 33046, 13 October 1972, Page 8

The great wool price rise mystery

In the annals of the history of the New Zealand sheep industry the last two weeks must rank as some of the

most exciting.

This period has seen wool prices recover to levels that few people thought would ever be seen again. The average for last week’s Christchurch wool sale could be about 170 c per kilogram or 93d per lb, which is more than three times the average of 53ic for the October sale last year, but it has to be remembered that the last October sale was the lowest of the season for halfbred wools and so makes the tremendous upsurge of the last two more weeks even more impressive than it unquestionably is. In Australia the National Council of Wool Seiling Brokers has reported an average of 165.54 c per kilogram (75c per lb) for last week’s sales, which is the highest average since 1950 and 29c per kilogram up for the week. At the remarkable Albury sale, when what the Australians call fine crossbred but which is better described here as halfbred, sold for a record 500 c per kilogram, the average was 188.13 c.

On top of this almost unbelievable upturn in the wool market, Canterbury farmers heard at the end of last week of the opening schedule for lamb, under which the standard prime 301 b lamb with a 0.7 c kilogram wool pull is worth $B.Ol, compared with $4.58 a year ago under the Meat Board’s emergency schedule, and just to cap off the whole picture good rains since last week-end put at end to an intensifying drought situation, ensuring feed supplies for some time to come, making hay cuts possible to provide feed for next winter, and also giving cash crops a welcome lift along the way.

Since wool prices began to spiral at Dunedin two weeks ago many people have been looking for the reasons, and some of the more colourful suggestions have even seen a link with Chinese suspicion of Russia and an attempt on the part of synthetic interests to do wool irreparable damage, by pushing the price for it to such levels that manufacturers generally will become disenchanted with the natural fibre. There are, however, a number of seemingly more substantial reasons why there should be a good market for wool, but hardly any that could possibly justify the sort of prices that have been paid in the last week or so. In these circumstances some of the experts have arrived at the conclusion that a speculative factor is involved. Professor B. J. Ross, professor of agricultural economics at Lincoln College, this week listed a series of factors that he said could individually be making a small contribution to the situation, and which collectively could make wool’s position look strong.

Professor Ross’s list included the revaluation of the yen, making it more attractive for Japanese interests to buy wool in Australia and New Zealand, for it is of course the Japanese who seem to be the people who have really set the wool market oft on its sky-piercing course. There is also a revival of economic growth in Japan and the expectation that wool supplies are going to be less. There seems to be some difference of opinion about the size of the Australian clip. The Bureau of Agricultural Economics in Canberra apparently put out a forecast earlier on that the clip could be down by 7| per cent, but trade circles have been talking about a drop of 20 per cent, which a Christchurch trade source noted last week would mean a drop from last season of no less than about a million bales. However it is now being suggested that the 20 per cent might be an overestimation of the real decline, related to receipts into brokers’ stores and not taking into account increased sales made privately by growers. There have also been reports of Japan receiving orders from Russia for textiles, and in particular yarn, and there is even a possibility that Japan may be expecting some business with China in this respect.

The recent talks between President Nixon and the Japanese Prime Minister, Mr Tanaka, may also have been an occasion for Mr Nixon giving his Japanese counterpart an indication that the United States will not be imposing further restrictions on imports of textiles from Japan.

And alongside a recovery in the textile industry is seen a swing against artificial fibres in favour of wool, in a world that is becoming increasingly concerned at man-made pollution.

But Professor Ross says that while all these factors point to a stronger wool market, he does not think that they justify the sort of prices that are currently being paid for wool and consequently there must be a strong speculative element, unless there are big orders for yams and textiles which have not been announced. It is unlikely, he thinks, that anyone really has firm orders for goods made from wool at current prices. Professor W. O. McCarthy, professor of marketing at the college, also subscribes to the view that speculation by some Japanese interests started off the present upsurge, in the belief that they can sell later what they are now buying at even higher prices. Mills in the United Kingdom and on the Continent have had to follow because they need wool. He, too, sees current supplies of wool in store being relatively low in relation to requirements. A pretty good explanation of variations in wool prices in the short term, he says, is the level of economic activity in consuming countries, or in business confidence, and he thinks that business confidence world-wide is improving following the temporary settlement of the international monetary crisis last December. So far Professor McCarthy noted that only 3 to 4 per cent of the New Zealand clip had been sold at very high prices so that the

overall average price for New Zealand wool had not yet been greatly affected, and so also it was not necessary yet to become too concerned at the effect of the high prices in turning manufacturers from wool to synthetics, but this would certainly be the result if these sort of price levels continued for long.

Last week between Australia and New Zealand somewhere about 3 to 4 per cent of the combined clips of the two countries found buyers at the high levels.

Taking into account the small quantity offered and also the likelihood that there was not a great deal of wool in the pipeline, Professor McCarthy said that it was likely that prices would remain relatively high for some period ahead, until the immediate demand from all mills had been met. The Australian “Financial Review” said last week: “so great is the demand for wool that there are reports of mills on the Continent seeking a full year’s supply. The game is now to achieve control of wool physically and not just contracts for forward delivery some time in the future. Mills want wool in hand so that they can assure garment wholesalers and retailers that the finished garments will be delivered.” Professor Ross said that there had been a suggestion that Japanese manufacturers might be price averaging — using wool bought at current prices with supplies bought earlier at much cheaper rates to keep prices for the end products at reasonable levels — but he added that when current orders for finished products were filled this presupposed that this sort of inquiry for wool would end and that for further deliveries prices for products would have to be at levels to compensate them for the higher wool prices. These latest movements in the wool market served to show just how eccentric the auction system could be, said Professor McCarthy. It only produced uncertainty in the minds of users (mills) and made them wonder whether they should hedge and turn back to synthetics. The antiacquisition people should take note of the present

situation. It would be far better for the industry and the economy of New Zealand if it was possible to offer this wool at a more reasonable price to ensure the continued use of the fibre.

Mr R. G. Pilling, senior lecturer in agricultural economics at Lincoln College, who recently spent five months in Japan, last week suggested a few possible reasons for that country’s interest in wool.

He was in contact with both users of wool and producers of synthetics during his visit to Japan and he said that producers of synthetic fibres also liked to use wool in blends believing that wool had qualities which the artificial fibres did not have, and there could be a demand for this sort of blended material that was stimulating present interest in wool.

Noting that the Japanese companies who had been responsible for the spectacular rise in the market at Albury last week were also associated with synthetic fibre production, and that it had been suggested that they could be seeking to push the wool market so high that it would damage the image of wool to the advantage of man-man fibres, Mr Pilling said he tended to discount this idea because of the interest of these people in wool in blends. These companies were also so big and with such ramifications that it was possible they could see outlets for wool that others could not see.

A psychological factor could also have been at work in Albury, in that thinking that one of their number knew something that they did not, they had all followed each other, not to be outdone.

Still another proposition has also been put forward by Mr Pilling. It is that Japanese manufacturers, who have a strong preference for the auction system of selling wool in comparison with other methods, may be giving a boost to the market in the short run to undermine support of or confidence in, any other system. Japanese sources have, however, denied rumours that they are attempting to comer the wool market. They claim that yam and top markets are increasing and wool is going into processing and not into speculative stocks. The Joint Wool Selling Organisation in Australia said that the extreme prices paid at Albury last week were the result of unprecedented Japanese buying pressure for hand knitting wools. One of the most imaginative stories surrounding the wool boom is that linking it with relations between China and Russia. The source clearly wishes not to be identified and it involves the piecing together of a series of recent events that make a not altogether impossible situation. It will be remembered that Russia is buying textile products from Japan. Early last week three leading Chinese newspapers carried editorials identifying Russia as their No. 1 enemy. This year China has bought 3.5 m tons of wheat

from Canada and when an Australian Labour Party delegation led by its leader, Mr G. Whitlam, visited China the Communists told him that the reason why China had stopped taking wheat from Australia and was buying from Canada was that Canada had recognised China and was on good relations with her. Since returning to Australia Mr Whitlam has been campaigning in rural areas telling farmers that the return of a Labour Government in Australia would mean a resumption of trade in wheat with China. But now with the Australian elections only two months away China has virtually stabbed in the back a friendly Labour Party by placing an order with Australia for a million tons of wheat. This action is only seen as having been dictated by an extraordinary situation and one of some urgency. Chinese suspicions about Russia could be leading to a decision to start stockpiling supplies and Japanese commercial interests, whose Prime Minister has also recently been to China, could be aware of Chinese fears and see ahead the prospects of trade in wool, or in woollen products, and hence the Japanese plunge into the market.

The present situation with prices for wool booming is seen as unprecedented in the period that synthetics have been available as an alternative to wool on a large scale and at a time of relative peace in the world.

It is believed that the Chinese could prefer wool to synthetics, in that the natural fibre produces a warmer garment. The “Financial Review” says that Russian and Eastern European interests could be about to become

more active in the market,! too, and Eastern Europe! were mentioned as being inj the market at Christchurch * last week. But adds Professor Ross:! “really no-one knows what is behind it all.”