Selling to maximise returns

Three main systems are used to buy wool from the farmers’ clip, Richard Gavigan writes.

Accurate wool statistics are hard to come by, but it’s thought that auction, private sale and forward contracts to supply now account for about 40%, 50% and 10% of the New Zealand wool clip respectively.

The fine wool market is buoyant, prices for strong wool are still low, but understanding how different selling systems operate can help in decision-making to maximise net wool returns.

Auctions held on alternate weeks

The first public auction of wool in NZ was in Wellington in 1854, and in the 1890s auctions were regularly held in Christchurch, Wellington and Napier.

By the 1950s, wool sales were held in eight centres: Invercargill, Dunedin, Timaru, Christchurch, Wellington, Whanganui, Napier and Auckland.

When wool sampling was introduced in the 1970s, rationalisation of the selling centres reduced auction venues to four and finally two: Christchurch and Napier.

Today, sales are typically held every second Thursday at each centre, with North Island and South Island sales held on alternate weeks.

The sale of wool by auction is organised by a wool broker. It is mandatory that all NZ wool brokers belong to the NZ Wool Brokers Association which sets the conditions of sale and ensures standards and regulations for the sampling and testing of wool are adhered to.

While there is typically no signed contract for service between wool brokers and their farmer clients, brokers act as specialist wool selling agents and perform a number of important functions. Those listed below are covered by the wool broker’s consolidated selling charge, which ranges from 15-30c/kg of greasy wool:

• Transporting the wool from the broker’s depot to the wool store. The farmer must pay for cartage from the farm to the depot.
• Receiving and checking the wool into the store.
• Weighing the bales and issuing a weight note to the farmer.
• Sampling the bales to obtain grab samples for inspection by potential buyers and core samples for the pre-sale testing of fibre diameter, colour, vegetable matter content and yield (extra tests are available). Farmers must pay an additional $100 lab fee for the wool test certificate.
• Producing a catalogue containing the details of all wool to be sold.
• Valuing the wool to establish its market value. This enables the farmer and their wool broker to set a reserve price and provides the auctioneer with a starting point for bidding.
• Displaying the wool grab samples to potential buyers.
• Running the auction.
• Communicating the sale price (c/kg clean wool) to the farmer.
• Handling all documentation and financial transactions.
• Paying the proceeds to the farmer 11 days after sale (“prompt date”).
• Storing unsold wool for up to six months. After six months, wool can still be stored but at the farmer’s cost.

Additional broker activities may include:

• Preparing the wool to rationalise very small or mixed lines or divided bales and fadges of wool into commercially acceptable sale lines. This includes binning (20-25c/kg greasy wool) which requires wool to be separated by type and placed in bins to be pressed later. And grouping (14-16c/kg greasy wool) which involves matching bales of wool of the same type and yield from different farms to make larger, more saleable lines.
• Reducing bales that weigh more than 200kg. This is a mandatory service, as overweight bales cannot proceed through the sampling system, and can cost $16/bale plus a binning charge for the amount of wool removed.

Some wool brokers do not charge for reducing overweight bales.

• Selling wool electronically. Wool brokers and their farmer clients may agree to sell wool online, with very similar preparation and costs to the traditional auction system.

Top two advantages

1. Wool is fully tested and specified so farmers know exactly what they are selling and what it should be worth.
2. Competition between buyers encourages the best price the market will pay on the day.

Private selling and brokers

A private buyer buys wool directly from the farmer. Private or in-shed selling has existed in NZ for almost as long as auction.

Some of the earliest private wool buyers were from overseas. NZ-based merchants quickly recognised that lines of farmers’ wool could be sorted, amalgamated and, after scouring, exported at a profit to the sales in London or direct to an international merchant or processing mill.

Today, some wool brokers also buy wool in-shed. While all private buyers buy wool directly onfarm, they can differ in how they sell that wool on.

Some are involved in wool exporting in their own right, some buy to fill firm orders from exporters and/or mills, some buy wool speculatively to make up lines which they offer for sale to exporters, and some sell using a combination of practices.

The price offered in-shed usually starts with exporters’ orders and associated prices, with the private buyer making allowance for their operational costs and profit margin to establish their buying price.

There is usually no signed agreement between the private buyer and the farmer, and because wool is not handled and displayed for sale by auction, private buying can be a lower-cost activity.

Buyers buy wool in-shed on the basis of a visual inspection, sometimes backed by the testing of a sample taken by hand from the bales in the woolshed. Some wool bought privately is later tested at the farmer’s expense to provide objective information for making up exporters’ orders and on-selling.

Whether selling privately or through the auction system it is important that buyers are able to physically see and touch the wool. It can be very difficult to assess the potential scoured colour of wool from a photograph, and being able to handle the wool is essential when subjectively assessing fibre diameter and yield.

Faults such as sheep marking products and sub-standard clip preparation, and the type of vegetable matter present, can really only be identified by looking at a representative sample of actual wool.

A private sale is usually finalised on a Wednesday evening before a Thursday auction, with private buyers phoning in their c/kg greasy offers to the farmer. Competition between buyers can be enhanced by inviting more than one buyer to quote on a line of wool as it is unlikely that one particular private buyer will always be able to offer the best price on the night.

When four or five private buyers are involved, it is not uncommon for the highest and lowest offers to differ by 20-30c/kg greasy. Once the wool has been purchased, it is transported to the private buyer’s store at no direct cost to the farmer and payment is made 14 days later.

Top two advantages

1. Lower cost selling system.
2. Wool can be sold and paid for quickly after shearing.

Contracts

While contracts to supply wool direct from the farm to a manufacturer at a future date have been in use since the 1990s, their prevalence has grown significantly in the last decade. Today, up to 70% of NZ fine wool production is supplied on contract, and contract use in crossbred wool supply is also evolving.

Wool contracts can differ widely in their conditions, but all are very precise in their terms. Some operate for a single year, while others can run for as many as 10 years.

In most cases the contract price is set at the beginning of each season. Supply requirements are very specific, with wool characteristics such as fibre diameter, colour, vegetable matter content, staple length and staple tensile strength set out.

The month of supply is specified, and minimum wool preparation standards in the woolshed are applied to both fine and crossbred wool contracts. If wool does not meet the contract specifications it reverts to farmer ownership to be sold, often through the auction system. In some cases, the wool may be diverted into a different contract.

In most cases, only part of an annual wool clip is sold on contract, with other types of wool that do not fit contract specifications sold conventionally.

Contracts typically carry similar charges to auction, with contract fees similar to, or in some cases above, the level of a wool broker’s consolidated selling charge and the wool testing lab fees charged separately.

Cartage to a wool storage depot is the farmer’s responsibility. Payment for contracted wool is most often made by the intermediary (e.g. wool broker) facilitating the contract, usually within four weeks of the wool arriving at the store.

Top two advantages

1. Gives certainty of price.
2. Provides production signals with wool characteristics clearly specified.