Why is Wool Valuable?
Wool is a textile fiber obtained mainly from shearing the fleece of sheep. It is a fabric prized for its durability, comfort and resiliency. Wool plays an important role in producing items such as clothing, blankets, carpets and upholstery.
Wool production dates back to prehistoric man. As far back as 10,000 BC, primitive tribes domesticated sheep both for the food they provided and for their pelts. Since early man found the pelts both durable and comfortable, he soon began to develop the tools and methods for making wool. By 4,000 BC, the ancient Babylonians were wearing garments crafted from woven wool fibers.
Today modern production techniques have transformed wool manufacturing into an enormous global industry. Worldwide production of the commodity is estimated at 5.5 billion pounds. Although cotton ranks as the top overall fiber used by industry, wool reigns as the number one global source for animal fiber.
What Types of Sheep Produce Wool?
A sheep’s breed, genetics and nutrition are the main determinants of wool production, but the interval between shearing also impacts yield.
Lambs produce smaller quantities of wool than ewes or rams. Generally, a ram produces more wool than a ewe of the same breed. (The wool from one sheep is known as fleece, while the wool from a group of sheep is known as a clip).
There are approximately 1,000 different sheep breeds, including more than 50 varieties in the United States alone. Each of these breeds has different features such as hair color and length, body type and breeding characteristics. Sheep are raised for milk, meat or wool depending on the breed and its physical characteristics.
Some breeds of sheep called hair sheep are covered in hair instead of wool. These sheep represent 10% of the global population and are raised mostly for meat.
Hair sheep shed some fibers, but they are of no use in wool production. They can’t be dyed like other wools, and their presence can contaminate usable fibers from wool sheep. For this reason, farmers avoid raising hair sheep with wool sheep.
|Sheep||Animal over one year of age that has usually produced offspring|
|Lamb||Animal less than one year of age with no offspring|
|Ewe||A female sheep. A young female is called a ewe lamb.|
|Ram||A male sheep that is sometimes referred to as a buck. A young male is known as a ram lamb.|
|Wethers||A castrated male sheep. Wethers are less aggressive than rams.|
|Yearling||An animal between one and two years. Yearlings may or may not have produced offspring.|
|Flock||A group of sheep|
|Shepherd||A caretaker of sheep|
|Sheepherder||The individual responsible for keeping the sheep together in a flock.|
Common Categories of Wool Sheep
|Category||Fiber Description||Global Production||Breeds||Farming Facts|
|Fine Wool Sheep||Small fibers - diameters of less than 20 microns.||About 37% of global output is fine wool. Fine wool is versatile and produces garments less likely to itch.||Merino, Rambouillet (found in Western United States)||Best adapted to dry and semi-dry regions. Known for their longevity and instincts to flock.|
|Long Wool and Carpet Wool Sheep||Large fibers - diameters generally greater than 30 microns. Carpet wool sheep produce the coarsest grade of wool, usually over 38 microns. As their name implies, these sheep produce wool for carpets.||Coarse wools represent about 41% of global production .||Border Leicester, Coopworth, Cotswold, Leicester Longwool, Lincoln and Romney. Carpet wool sheep varieties include Icelandic, Karakul, Navajo Churro and Scottish Blackface.||Adapt best to cool areas with high precipitation levels and ample crops for foraging. Carpet wool sheep are well adapted to extreme environments.|
|Medium Wool Meat Sheep||Can produce medium or long fibers. Farmers mostly raise these sheep for meat.||Produce the lightest and least valuable fleeces. Some medium wool can be made into blankets, sweaters and socks. This category represents 22% of global production.||Dorset, Hampshire, Shropshire, Southdown and Suffolk||Adapt to a variety of climates.|
How is Wool Produced?
There are seven steps in the production of wool:
- Grading and Sorting
- Cleaning and Scouring
Farmers usually shear sheep once a year in the spring, although in some countries this occurs more frequently. Most shearing takes place by hand, although new technologies allow computers and robots to complete the task. Experienced shearers can shear up to 200 sheep a day.Each sheep yields between six and 18 pounds of fleece, which shearers attempt to recover in one piece.
Grading and Sorting
Sorters break up the fleece according to the quality of the product. The best quality wool derives from the head and sides of the animal and is used to make clothing. Lesser quality wool comes from the legs and is usually used for making rugs.
Cleaning and Scouring
Wool taken directly from sheep is called grease wool. It contains contaminants such as sweat and dirt that comprise 30 to 70% of the total fleece weight. Alkaline baths clean the fleece and remove byproducts called lanolin. These byproducts are used in the production of many household products.
During this process, the fibers are passed through metal machines and straightened into slivers.
Spinning machines form yarn by spinning the fibers together.
Two types of machines – plain weaves and twills – weave the yarns into fabrics. Plain weaves produce looser fabrics, while twills can produce tightly woven smooth fabrics with elaborate patterns.
Several finishing processes ensure that the fibers interlock and do not shrink. During this stage, some garments are dyed as well.
According to the Food & Agricultural Organization (FAO) of the United Nations, the global inventory of sheep exceeds 1.1 billion.
Top 10 Wool Producing Countries
|Rank||Flag||Region||Production Output (tonnes)|
|#3||United States of America||150,873|
4 Main Uses of Wool
|Uses Of Wool||Description|
|Clothing||Most fine wool is woven or knitted into a variety of clothing items:|
|Furnishings||Thicker wools can be used to produce a variety of furnishings:|
|Carpets||Coarse wools can be woven into carpets.|
|Lanolin (wool grease)||Lanolin is a byproduct of wool production and an active ingredient in many skin, hair care and cosmetic products. Lanolin is known for its ability to moisturize and soothe skin and hair.|
What Drives the Price of Wool?
There are four key factors that impact wool prices. However, none of these is of obviously greater importance than the others:
- Wool Stocks
- Consumer Preferences
- Workplace Trends
- Australian Dollar
The supply of yarn and wool tops, the semi-processed product used to make yarn, in warehouses can impact the price of wool. As these stocks build to higher levels, spinners have a diminished demand for wool tops. This, in turn, can cause the price of greasy wool to fall.
On the other hand, if demand for finished clothing products accelerates, then wool top and yarn inventories can get depleted. This can lead to a supply shortage of greasy wool and higher prices.
Consumers increasingly demand thinner apparel fabrics, although this trend can certainly change in the future.
To keep pace with these trends, the wool industry is increasingly spinning finer wool and producing more breathable, lightweight garments. However, other natural fabrics (e.g., cotton and silk) and synthetic fabrics (e.g., polyester and acrylic) compete in this lightweight segment of the market.
Traders should keep careful tabs on these trends. Wool manufacturers are revising their production practices to develop sportswear and next-to-skin lightweight garments. Their failure or success in these endeavors could impact wool prices.
In addition to consumer preferences for lighter garments, workplace trends also impact wool prices.
In recent years, there has been a trend toward casualization of offices in many Western countries. These trends are detrimental to wool demand since the vast majority of business suits are made from worsted wool.
However, in many emerging market countries, increased economic activity is producing more demand for suits and other wool products.
Traders should pay attention to overall white-collar employment and workplace trends for clues about wool prices.
The main futures markets for both greasy wool and fine wool futures are in Australia. Unlike most commodities, which are priced in US dollars, wool futures are priced in Australian dollars.
When the value of the Australian dollar drops against other currencies, it takes more Australian dollars to purchase wool than it does when the price is high. Therefore, the price of wool rises. Put another way, sellers of wool get fewer Australian dollars for their product when the currency is strong and more Australian dollars when the currency is weak.
3 Reasons You Might Invest in Wool
Investors should consider buying wool for the following reasons:
- Bet on Emerging Market Demand
- Inflation Hedge
- Portfolio Diversification
Bet on Emerging Market Demand
Fashion and consumer preferences play an important role in determining wool prices. Trends in these areas in emerging market seem favorable for the commodity.
China has a GDP of over $11 trillion, while the size of India’s economy is over $2 trillion. Both of these economies are expected to continue to grow strongly in the years ahead.
Chinese consumers have shown a strong preference for wool products in recent years. As the economies in these two emerging powerhouses continue to grow, the demand for wool could outpace supply.
Investing in wool is a way to bet on higher inflation.
The Reserve Bank of Australia, like virtually all major central banks, has kept a very accommodating monetary stance for the past several years. These easy money policies have the potential to stoke inflation.
Global central bankers are likely to continue these policies to support consumer borrowing and spending, and these conditions are likely to be very beneficial for wool prices.
Since there is limited land and a limited supply of sheep, the price of wool and other commodities would likely benefit from fears of inflation.
Most traders have the vast majority of their assets in stocks and bonds. Investing in wool provides a sensible way to diversify and reduce the overall risk in a portfolio.
Should I Invest in Wool?
Wool prices can be volatile and subject to changes in fashion trends and fickle consumer preferences. Traders who want exposure should consider purchasing wool as part of a basket of commodities.
To achieve true diversification, the basket should include grains, livestock, lumber, metals and energy in addition to wool. Purchasing a basket of commodities helps protect traders from the volatility of any individual commodity. It also adds diversification to a stock and bond portfolio.
There are two specific trends that could boost wool prices in the years ahead:
The wool industry is being proactive in dealing with changing consumer preferences. The implementation of new processes to produce lighter weight garments could create new pockets of demand for the commodity. In particular, the industry is now focusing on developing better quality superfine Merino fleece wool, which could have special appeal to the suit and luxury apparel markets.
Emerging Market Growth:
Emerging market countries such as China and India are building wealth and purchasing more high-end clothing. Demand for wool to produce both work clothes and fashion items should grow.
However, traders should also consider the risks of investing in wool:
- A global spike in interest rates or a global recession could depress demand for wool clothing items.
- A shift in consumer preferences could benefit cotton or synthetic fabrics at the expense of wool.
- Overproduction of wool by farmers could create a supply glut and depress prices.
Expert Opinions on Wool
Analysts are impressed with recent strength in wool prices, but many wonder whether it is sustainable.
One expert attributes strong Chinese demand and a weak Australian dollar for the price performance:
“The somewhat lower Australian dollar, to which the wool industry is usually very sensitive, has probably helped in the last month. Still, it is unclear whether prices are sustainable at their current levels. While we see good signs in the form of very strong Chinese demand, this is not guaranteed to continue.”
Phin Zieball, National Australian Bank, agribusiness economist
However, another industry expert sees new pockets of demand that point to longer-term price strength for the commodity.
“One key point is consumer appetite has moved distinctly in favour of natural fibres, with health, sustainability and ethical practices leading the way. Consumers know what they want and wool is certainly much higher on the shopping list today than it has been for many years.”
Matthew Hand, Australian Council of Wool Exporters and Processors president
How Can I Invest in Wool?
Investors have a very limited number of easy options for gaining exposure to wool prices:
Wool Trading Methods Compared
|Method of Investing||Complexity Rating (1 = easy, 5 = hard)||Storage Costs?||Security Costs?||Expiration Dates?||Management Costs?||Leverage?||Regulated Exchange?|
The Australian Securities Exchange (ASX) offers two different futures contract on wool – a greasy wool futures and a fine wool futures contract.
Each contract settles into the equivalent of 2,500 kg clean weight of merino combing fleece.
Each contract trades between 10:30 am and 4 pm and has expiration months of:
Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the greasy wool future is physically settled by delivery of wool, while the fine wool future is cash settled.
Investing in futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.
These financial instruments trade as shares on exchanges in the same way that stocks do. There is no ETF that offers pure-play exposure to wool prices.
Shares of Wool Companies
There are no public companies that are a pure-play investment in wool.
One way to invest in wool is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of wool. The value of a CFD is the difference between the price of wool at the time of purchase and its current price.
Some regulated brokers worldwide may offer CFDs on wool. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that trader can have exposure to wool prices without having to purchase shares, ETFs, futures or options.
One of the leading brokers for trading agricultural commodity CFDs is Plus 500. Here’s why:
- No commission on trades (other charges may apply)
- Free demo account
- Easy to use (mobile-friendly) platform
- Industry-leading risk management tools
- Trade hundreds of other CFDs
- Your funds are safe – publicly listed company regulated by the UK’s Financial Conduct Authority and Cyprus’ Securities and Exchange Commission
Important: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail trader accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.