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Beyond the Bale : March 2011
14 OFF-FARM March 2011 BEYOND THE BALE The New Year has seen the Eastern Market Indicator (EMI) continue to climb strongly. What has caused this rise in prices for Australian wool? There are three key demand factors and a supply factor contributing to the current prices. WOOL IS BACK IN FASHION The first factor is that wool is very much back in fashion in the northern hemisphere, as indicated by the increased stocking levels and sales of wool products by retailers this past autumn/winter season. Although the particularly cold winter temperatures experienced in Europe and the USA have no doubt contributed to the increased demand this season, there appears to be a genuine trend towards wool. The increased demand for wool in the fashion markets is expected to filter down over the next 18-24 months into high street retail stores. HEALTH AND SUSTAINABILITY The second driver is the rapidly growing consumer demand for products consistent with a Lifestyle Of Health And Sustainability (LOHAS) -- the so-called "LOHAS consumer". Consumers are insisting on greater integrity and authenticity in the products they buy. They are demanding products that firstly provide wellbeing and secondly are also planet-friendly. The focus by consumers on their wellness and own health is creating openings for wool products that are suited to new healthy leisure pursuits or meet new comfort requirements, such as temperature regulation and breathability. Changes in buying behaviour due to the impact of eco-awareness are also being noted in the economy and retail markets. As a natural, biodegradable and renewable fibre, wool is well placed to take advantage of this growing development. CHINESE AFFLUENCE The third and probably the most significant driver for building the demand for Australian wool is the growing size and affluence of the Chinese domestic market. China has always had two of the three key triggers for mass consumption of wool: they have always had the suitable climate and large population; they now have the third trigger which is wealth. China is the second largest luxury market in the world. The country consumes over a quarter of the world's global luxury products; Chinese luxury purchasing will surpass the USA by 2015. Whereas China used to source most of its wool from other countries, Australia has become China's dominant supplier -- in recent years 70-80 per cent of China's wool imports have come from Australia. In fact, China now buys and processes 70 per cent of the Australian wool clip. Australian wool now makes up around 60 per cent of wool available to consumers in China. The tailored men's apparel market is experiencing exponential growth and it is not anticipated to slow down. WOOL SUPPLY Improved rainfall across most of the wool growing areas in the eastern states has created the best grazing conditions for many years. However, while feed and water are plentiful, sheep to consume it are not. The number of sheep shorn in 2010/11 is forecast to be 72 million head and national production is now at its lowest in about 85 years. Concern from buyers about the reduced wool supply may have had an additional effect on the EMI. Despite the recent downward trend, wool production is tending to stabilise nationally, and producer intent to retain or increase sheep numbers is apparent; woolgrowers are very keen to retain older ewes and ewe lambs for breeding purposes. However, the positive impact of these decisions on wool production is not expected until 2011/12 and beyond. It is crucial to rebuild Merino ewe numbers again. This may take some time, but it is necessary so that Australian woolgrowers can take advantage of these higher demand-driven wool prices. CONCLUSION The growing number of "LOHAS consumers" around the world and the new appreciation of the natural properties of wool in northern hemisphere markets have no doubt made a strong contribution to the increase in demand for wool. However, the emergence of large numbers of affluent consumers in China -- a consumer market megatrend -- has become the key demand driver holding wool up in the four digit EMI area. As the second largest luxury product market in the world, China has changed the sources of its wool to obtain a higher standard of wool -- they now preferentially source from Australia. AWI's marketing in China is aimed directly at this massive aspirational market. The Gold Woolmark campaign (see page 9) focuses on the sophisticated market of suiting, while AWI's work with creative young brands is making aggressive 'incursions' into new fashion markets. Other countries such as India also have growing aspirational markets, similar to China. There is the possibility of a "new world for wool" -- a new world in the sense of emergent, affluent markets and a new world in terms of driving Australian wool hard into these markets. FAST FACTS l Increased global consumer demand for wool has increased the price that buyers are prepared to pay for wool. lThe emergence of an affluent Chinese domestic market has been important in building the demand for wool. lWool is well placed to take advantage of growing consumer preference for healthy and natural products. Demand driving the wool market WEEKLY MARKET REVIEW A review of the each week's wool sales and prices around the country is available on the AWI website at www.wool.com/marketinformation on the Monday morning of the following week. To receive an email alert from AWI when the week's market review is available, please email email@example.com to subscribe (no charge). MARKET INTELLIGENCE Monthly market intelligence reports are available on the AWI website. View the reports at www.wool.com/marketintelligence