Wool prices are "likely to fall", undermined by the weaker cotton market, but not by enough to threaten a revival in the sheep flock in Australia, the top producer and exporter of the fibre, where numbers have been in decline for 20 years.
Wool values, which remain within 12% of a record high set in June, according to the benchmark Australian eastern markets index, will feel a tug from cotton prices which have fallen well below half their all-time high, set in March.
Without wool price declines, "millers will increase the composition of cotton and polyester at wool’s expense", Luke Matthews, at Commonwealth Bank of Australia, said.
At National Australia Bank, Michael Creed said that the decline in wool values would "accelerate in spring as more production comes online".
‘Sizeable floor under prices’
However, it was "unlikely" that prices, which according to the eastern market indicator stand at a historically high Aus$13.15 a kilogramme, "will dip too far below Aus$11.00 a kilogramme", Mr Creed added.
"Supply will continue to remain critically tight, both in Australia and in key competitors abroad," he said.
"This places a sizeable floor under prices."
Besides a slump in Australia’s wool output from a high of more than 1m tonnes in 1989-90 to 382.3m tonnes in 2009-10, according to official data, production in New Zealand, the second-ranked exporter, has more than halved to 358,000 tonnes from its 1980s’ peak.
Furthermore, wool traders have sold down inventories heavily to take advantage of the rise in prices which, for the eastern market indicator, remain more than 50% higher than those a year ago.
Sales of stockpiled wool are expected to allow Australia to lift exports by 5% in 2010-11 despite of weak production, CBA’s Mr Mathews said.
‘Flock rebuild effort’
Stronger wool exports ahead would be enabled by higher Australian production, set to rise by 1.6% in 2011-12 – the first increase in seven years – amid a second year of expansion in the national sheep flock, Mr Mathews added.
"The recent high wool prices are likely to promote a flock rebuild effort," he said.
Historically high wool values, "and an assumed normalisation in seasonal conditions will facilitate continued flock expansion in the coming five years".
The rate of flock growth will depend on, besides the wool market, the price of lambs, which are also in demand by meat processors, and the increasing turn by farmers to lower-hassle markets, such as crops.
"Put simply, many farmers, irrespective of price, are not going to swing back into wool production," Mr Mathews said.