JSE launches wool futures contract

Prabashinee Moodley

The Johannesburg stock exchange  (JSE) has listed a cash settled merino wool futures contract on its Commodity Derivatives Market. The contract allows farmers and wool buyers to protect themselves against movements in the wool price.

This follows the recent listing of a lamb carcas futures contract which tracks the price of A2 and A3 quality lamb.

The settlement price of the new contract will be determined by the Merino Indicator, an index created by Cape Wool SA. The indicator reflects movements in the price of wool by calculating a weighted average price of a basket of wool sold at a specific wool auction and then comparing it with the result of the previous auction. Wool auctions take place in Port Elizabeth weekly, during the wool growing season.

Chris Sturgess, JSE Director: Commodity Derivatives, says the exchange looks forward to working closely with the wool industry to build a liquid market for the new contract. “When Cape Wool SA approached the JSE about creating a wool futures contract, we were very excited to be able to respond to the needs of another segment within the agricultural sector.

The South African wool industry is poised for exceptional growth at the moment and the JSE is privileged to have the opportunity to play a role in helping it to realise its potential.”

Louis de Beer, CEO at Cape Wool SA, says demand for wool is excellent at the moment as global wool production is at a historic low. “The industry is extremely positive about the current opportunity to increase wool production. As we embark on this, the new contract will provide farmers with a mechanism to limit the risks they face related specifically to the price of wool. However, there are also many other role players subjected to price risk in the wool industry, including buyers and processors, who can also benefit from the contract.”

The daily fluctuations in the price of wool can be influenced by several factors, including the demand for wool from Australia and South Africa, exchange rate fluctuations, orders from different buyers as well as the quality of wool on offer.

The pattern of wool deliveries is cyclic, with different qualities and quantities arriving at different times during the season, causing the price to fluctuate.

De Beer says the contract can also help participants in the wool industry to gain greater access to finance as it can be presented to banks as collateral, which can further support investments in increasing production. South Africa produced 52,5 million kilograms of wool this year, but De Beer says there is room to increase production by another 22,5 million kilograms.

Almost all wool produced in South Africa is exported and the value of trade in the industry amounts to around R4,5 billion per year. South Africa has between 4500 and 9000 commercial wool producers and between 30 000 and 50 000 communal wool producers.

The size of the contract is 1000 kg of clean weighed wool (1500 kg greasy weight). To focus the liquidity of the contract, four hedging months are available for listing on request namely March, June, September and December.

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