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The report, 'Wool – back in fashion?', by agribusiness banking specialist Rabobank, says while a number of challenges remain, the past year has seen global wool markets perform strongly as the supply-demand balance has tipped in favour of demand after many years of a supply overhang.
Report author, Rabobank analyst Airlie Hoskins says the structurally low level of global wool supply has created conditions for a tighter market, however new demand drivers also appear to be playing a more prominent role in global markets, adding to competition for available supplies.
"Changing dynamics in global wool consumption, historically low wool supplies and wool's improved price competitiveness relative to cotton and man-made fibres have resulted in above-average levels for wool prices over the past year," she says.
New Zealand market dynamics
New Zealand wool production has fallen to historically low levels, particularly as a result of a sharp decline in the national sheep flock in recent years, Hoskins says.
"Dairy milk production expanded by approximately 15% from 2007 to 2011, diverting a greater percent of resources available for wool and sheep meat production into dairy," she says.
"The ongoing conversion into dairy production and competition from alternative fibres will continue to challenge the New Zealand wool industry."
New Zealand exports fall
The Rabobank report shows that total raw wool exports from New Zealand declined by approximately 8% from July to January 2011/12 (clean weight) compared with exports for the same period last year.
Hoskins says global macroeconomic uncertainty and the historically high value of the New Zealand dollar against the US dollar have weighed on demand this season.
"Demand from China – the predominant export destination – remains strong, with exports to China increasing by 15% from July 2011 to January 2012, and accounting for almost half of New Zealand's total wool exports so far this season," she says.
"By contrast, exports to the EU have been weaker, falling by 15 per cent year-on-year, as the impact of the sovereign debt crisis begins to take its toll on textile retail sales."
Outlook
Globally, Ms Hoskins says, historically low wool supplies are expected to continue to support the New Zealand wool market above long-term average levels in the foreseeable future, although the high level of the New Zealand dollar is expected to take some of "the shine off" the market going forward.
Despite generally favourable seasonal conditions, any supply response to more buoyant market prices is forecast to be limited in New Zealand due to the depleted state of the national sheep flock, she says.
"Any longer term recovery in production will likely be challenged by competing demand from other farming enterprises."
Ms Hoskins says the demand outlook for wool has softened in the 2011/12 season in line with the fragile economic environment in many of the main wool-consuming countries.
Overall, she says, "A sustained period of elevated profitability will be required to sway New Zealand farmers to return to the fold, however the great potential of emerging markets is likely to deliver promising opportunities, provided the necessary investment in innovation and marketing is made to secure them".
