Tough Times For The Wool Industry

29 March 2017

Wool has fallen on hard times, even though it once partly drove the global economy and imperial expansion. Global wool production today is a fraction of its peak in 1990, replaced by cheaper and highly adaptable synthetics and cotton blends better suited to dyes and mechanical handling.

Wool was a treasured commodity and funded Spain’s maritime exploration, including that of Christopher Columbus. However, recent wool prices at major auctions in New Zealand have only fetched just enough for producers to cover shearing costs per sheep. As competition for land increases, sheep stocks in major wool producing countries have dropped significantly.

Farmers with limited pastures and roughage resources are shifting to dairy, beef, and even cereal farming that average greater returns. A prime example of this is Australia’s shift from wool to beef and cotton farming. Wool production decreased by 51 percent between 1961 and 2013, while beef production increased by 260 percent over the same period. Meanwhile, cotton lint production increased by a staggering 511 percent.

Currently, thriving niche luxury markets are dwarfed by former demand. In the second half of the 20th century, wool was a necessity in military uniforms, fleeces, tapestries, and winter clothing. But now, with a limited audience remaining, what does the future hold for wool?

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Background
The decline of wool
Wool prices
An uncertain future

Background

At the very dawn of agriculture, in 10,000 BC in the Fertile Crescent, early herders domesticated and reared sheep for their wool, meat, and fertilizer. Wool was worn as pelts until around 3,000 BC, when the introduction of weaving and spinning led to woolen fabrics and clothing.

Experts consider wool felt to be the world’s oldest textile. By 50 AD, English sheep supplied an entire wool industry established by the Romans in what is now Winchester, England. Wool production became the backbone of the English economy by the 12th century, and even acquired a nickname: “the jewel in the realm”. The Wool Act of 1699 would further expand and protect the industry within the British Isles by banning exports from the American colonies.

The wool industry flourished in Australia after British army officer John Macarthur brought sheep to the country in 1797. He introduced Merino sheep—a Spanish breed prized for its soft, fine, and lustrous fiber. They thrived in the rugged mountain terrain and climate of southern Australia, beginning the country’s long history with the commodity. By the late 1800s, the Sydney Wool Exchange was trading 100,000 pounds of wool in a single afternoon. Introduced later to New Zealand in 1840, the wool industry would be credited with driving the country’s economy at the start of the 19th century.

Shepherds and traders made fortunes in New Zealand’s wool boom that coincided with the Korean War (1950-1954). The US’s strategic stockpiling of wool tripled prices of the commodity overnight in New Zealand. Wool export values increased by over 40 percent between 1950 and 1951. The same trend was mirrored in neighboring Australia.

After the Korean War boom, the major wool producing countries faced the new and unexpected threat posed by synthetic fibers and improved cotton. Wool would go on to fight a losing battle in the following years as its popularity and market share were eroded by rival fibers. In Australia, wool production by 2016 had dropped 63 percent from its peak in 1990.

The decline of wool

Misguided optimism fueled by the post war wool boom led to the glut that caused the Wool Crisis of 1990-91. The Australian Wool Corporation (AWC) set a minimum trading price for wool to benefit its stakeholders and producers. As one would expect, this resulted in farmers producing more wool while buyers shunned wool in favor of cheaper fibers. Wool stocks piled up in inventory and ultimately crushed global prices and production.

South America, a historically significant producer of wool, also suffered a significant decline in wool production partly due to the AWC’s ill-advised pricing scheme. Sheep stocks decreased at an annual rate of 5.9 percent between 1991 and 2009 in Brazil’s southernmost state alone; while Uruguay averaged an annual loss of 950,650 sheep between 1991 and 2010.

Cotton was perhaps the greatest challenger to wool, as a natural fiber that is easy to transport and produce. Cotton fabric became significantly cheaper to manufacture with the mechanization of processing from harvest onwards. In contrast, wool production is still a labor intensive practice. Even when shearers use motorized equipment, effectiveness largely depends on their manual skill. Mechanization in spinning and weaving caught on slowly because of the elastic and crimped nature of wool fibers, adding another handicap to its price competitiveness. During the wool crisis in 1988, raw wool producer prices in the US were more than double those of the global benchmark upland cotton.

Sheep, especially those bred for their wool, thrive in temperate or desert regions and require a considerable degree of pasture land. However, pastures’ nutrients and carrying capacity continue to dwindle with growing populations and limited resources. Additionally, sheep are known to overgraze pasture land, voraciously devouring everything in reach. For this reason, free range sheep need additional monitoring, making them more labor intensive than pickier cows.

Sheep are also particularly susceptible to predators and disease infestation, adding to land and labor costs. The Australian sheep blowfly lays its eggs in the wool, skin folds, or wounds of sheep. The larvae feed on the sheep’s flesh after hatching and reproduce rapidly in the summer months. Flies can quickly spread to the rest of the flock causing wool degradation, animal weight loss and sometimes death—a condition referred to as “flystrike”. Managing flystrike in sheep alone costs Australia AU$ 280 million per year. Keeping the effects of lice infestation at bay costs another AU$120 million annually.

“Mulesing” is one way to avoid wool and meat losses through flystrike. It involves cutting off the wool producing skin around the hindquarters of the sheep. Practiced since the early 1900s, particularly on merino sheep with extensive skin folds, mulesing has come under intense criticism. Major apparel retailers, such as Adidas, Timberland and Victoria’s Secret, now require wool producers to declare the mulesing status of their sheep in a document referred to as the National Wool Declaration .

With the odds stacked against them, it’s understandable that wool producers would naturally shift to farming cereals and livestock. In 1961, the global export value of milk powder was only 65 percent that of greasy wool. Since then, the tables have turned as farmers shift to dairy, beef and sheep meat farming. In 2013, export value of greasy wool was 27 percent that of milk powder.

Wool prices

After bottoming out at $886 per tonne (adjusted for inflation) in 2000, producer prices for wool hit a record high of $3,556 per tonne (adjusted for inflation) in 2011. This price firmness could be attributed to the record high prices of cotton at the time. The steep rise was mirrored globally in response to the short supply of wool and further exacerbated by drought conditions in Australia. Even with record prices, wool producers don’t profit very much. In the UK, shearing costs were 1-1.50 pounds (GBP) per sheep with an average producer price of 169 GBP per kg. However, this high was short-lived.

Today, despite producer prices showing an upturn, they are still nowhere near 2011’s peak. While US producer prices have more than tripled, fetching $2,900 per tonne in 2016, supply still continues to fall independent of demand, and this may reflect a lack of producer confidence in the once booming wool industry.

Processing of greasy wool from its raw state to wool tops and yarns has shifted from once major wool processing countries to China. The country accounted for 74 percent of global greasy wool imports, for use in both early stage processing and manufacturing, in 2013. As an example, Japan imported just 2 tonnes of greasy wool in 2013 compared to 38,388 tonnes two decades before. However, imports of wool tops and combed wool from China to Japan increased by over 168 percent in the same period.

An uncertain future

Experts expect global textile fiber consumption to increase in the coming years, in line with increased income and population size. Wool’s future is not as bright. With prices currently six times that of cotton and seven times the price of synthetic fibers, wool consumption is projected to remain almost unchanged in 2020. Increased food demand and competition for arable land that comes with a swelling global population should lead to a gradual increase in sheep meat production. Sheep stocks in Australia are projected to rise from 75.5 million sheep in 2013 to 77 million by 2020, a meager 2.5 percent increase.

High-end niche wool markets exist where consumers value wool properties such as fiber color, origin, and diameter. One unique example is the fur blend made from Merino wool and the soft fur of possums—considered a major pest in New Zealand. This luxurious blend is referred to as perino and has been produced for the past 15 years. With possum-related garments generating retail sales between NZ$100 and NZ$150 million per year in New Zealand, such niche industries may be the needed spark to propel the wool industry into the future.

But that’s an awfully thin rationale for an entire global wool industry. Competition for resources will likely see a continued rise in production costs. Unless innovations in wool production are introduced to cut these costs substantially and revamp production, the outlook for the wool industry may be a continued steady decline. Despite a brilliant history spanning a period from the dawn of agriculture to the wars of the 20th century, wool may end up as a luxury item in select markets, and sheep may be primarily raised for their meat.

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