Cotton rally does not mean wool values will soar

The spike in cotton prices does not mean that prices of rival fibre wool will rise - in part because of doubts over the rally's longevity, but also thanks to some weakness in wool market fundamentals.

While New York cotton futures eased in early deals on Friday, falling 0.9% to 82.16 cents a pound for March delivery, a decline would represent only the first in eight sessions, and over which they still remain 9% ahead.

However, National Australia Bank forecast nonetheless a 13% drop in prices of competitor fibre wool over the course of the 2012-13 year, to November, leaving the benchmark eastern market indicator price at Aus$11.30 per kilogramme.

And rival Commonwealth Bank of Australia foresaw the indicator averaging Aus$9.20 a kilogramme in December, a price which would represent a three-year low.

Australia is the top wool exporting country.

'Competitive pressure from cotton'

While the Australian sheep flock is 25%, or 25m head, below 2003-04 levels, and farmers switched somewhat from the merino breed prized for their wool to varieties aimed at producing meat, production looks like rising 4% in 2012-13, National Australia Bank said.

"Significantly, fine wool is expected to comprise a larger proportion of the clip."

Furthermore, the cotton price may not provide so much support given that the ratio of wool to  cotton, in Australian dollar terms, is at a historically high level of about six, twice the levels reached in early 2011 when cotton prices hit a record high.

Indeed, "competitive pressure from cotton prices is likely to continue given relatively high global cotton stocks", besides a "particularly weak" eurozone market.

The bank said its price forecast "reflects our views about the robustness of the Chinese and US economies, while recognising the ongoing weakness in demand in Europe".

'Subdued demand'

At Commonwealth Bank of Australia, agri commodities analyst Luke Mathews said that China represented "the one bright point" in wool demand.

"China is now Australia's largest market, taking 75% of Australia's total wool exports," he said.

However, this was "not a result of expanding Chinese demand, but rather declining exports to other destinations".

Indeed, the bank was forecasting "subdued global woollen textile demand, the strong Australian dollar: US dollar exchange rate, and subdued global cotton prices to weigh on Australian wool prices throughout 2013".

Temporary price spike?

Indeed, CBA forecast cotton prices reversing back to average 70.0 cents a pound in December.

"Similar sharp rallies in global cotton markets were observed in June 2012 and October 2012," Mr Mathews said.

"In both of these cases the rally lasted about a fortnight, but within another fortnight prices were back where they started.

"Only time will tell if the current rally proves any different."

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