Wool futures

The operation of the wool market presents growers, local merchants, local exporters and offshore mills with different price risk scenarios:

  • Growers are exposed to the risk of low wool prices. They need to manage cash flows to meet financial obligations relating to operational and maintenance costs, production costs, and financial charges.
  • Local exporters are exposed to the risk of high wool prices. They need to manage their gross margin which is the difference between buying from growers and merchants at uncertain and volatile prices and selling to overseas markets.
  • Local merchants may be exposed to the risks of both high and low prices. They need to protect their positions, and subsequently their profits, through the process of hedging.
  • Offshore mills, similar to local exporters, are exposed to the risk of high wool prices. They need to manage uncertain and volatile wool prices to control the input costs of their milling operations.

To alleviate these risks the above parties can enter into financial contracts (futures) to fix the sale or purchase price of wool in advance. This provides certainty, as the profit/loss made on the financial contract should offset the impact of unfavourable/favourable movements in the physical market.