NZ finishes 2014/15 wool season with smallest volume sold at auction in at least 7 years

New Zealand's 2014/15 wool season ended this week with what is expected to be the smallest percentage of the clip sold through auctions in at least seven years, as more farmers were attracted to the premium prices and protection from commodity price volatility offered in private sales.

The auction system's share of wool is expected to continue to shrink. An estimated 464,000 bales are expected to come up for auction in the 2015/16 year, down from 480,000 bales in 2014/15 and 493,000 bales in 2013/14, according to Wool Services International executive Malcolm Ching, who is on the roster committee which estimates wool bale supply for the auctions. Ching said the committee has been forced to revise down its estimates in recent years to reflect declining sheep numbers and an increased amount of wool circumventing the auction system.

New Zealand has probably rounded out its smallest annual wool clip in six years this season, reflecting the lowest sheep flock in more than 70 years, dry conditions and an increased focus on meat producing breeds of sheep. The amount of wool that is going through the nation's auction system is also declining as farmers are seeking higher returns from direct contracts, said Ching, who estimates about half the nation's wool passed through auction this season. That compared with 59 percent of wool which headed to auction in 2012/13, according to data from farmer-owned industry organisation Beef + Lamb New Zealand.

"There has been a bit of a shift in how farmers are looking to sell their wool and some farmers are choosing to move their wool away from the auction system," said Ching. A small shift away from auctions began in the 2013/14 season, "whereas in the 2014/15 current year there has been a huge shift, it has escalated a lot more".

The move away from auction is being driven by organisations such as wool marketer Merino New Zealand which aims to insulate wool from commodity price swings by setting up direct supply agreements with companies such as New Zealand outdoor clothing brand Icebreaker, British knitwear brand John Smedley and Italian manufacturer Loro Piana.

Growers pay 4 percent of their revenue to the marketing body which aims to deliver higher prices to the farmgate in return.

NZ Merino moved into strong wool in December when it inked a three-year deal with Landcorp Farming to manage its annual coarse wool clip of 15,000 bales, some of which has since been contracted to Danish luxury slipper brand Glerups and the company is prepared to let the remainder of its clip be sold through traditional channels until the wool marketer can secure further deals.

"We are trying to play a long game here," Landcorp chief executive Steven Carden said. "We are prepared to stand behind them for an extended period of time as they develop those markets rather than give them supply one year and pull it the next year. We are trying to future proof our business by trying to secure as much of our business out of that commodity swing as we can."

Strong wool marketer Wools of New Zealand is also eschewing the auction system through its direct-to-scour programme with WSI and through supply contracts with companies such as UK upholstery weaver Camira.

Farmers who take up such contracts are betting on getting premium stable prices, while manufacturers benefit from having a trail back through environmentally friendly processes to a farm which they can showcase to customers, said WSI's Ching.

"The direct selling options have to provide better returns to farmers to warrant them shifting to it because a lot of these direct selling options come with some form of levy factor to assist the entities that are trying to develop these better methods get through the development phases," Ching said.

"Farmers will only wear those costs for so long and unless they see positive results from it, they will move away from supporting it and drift back to more traditional methods."

(BusinessDesk)