Risk Warning: Your Capital is at Risk.
This guide focuses on wool trading and why traders may be interested in speculating on wool prices.
Along with different ways to trade wool, we provide a list of regulated brokers for you to choose from.
In a hurry? If you want to get started trading wool, here are brokers available in to consider:
Disclaimer: Availability subject to regulations.
Between 74-89% of retail investor accounts lose money when trading CFDs.
Read on to find out whether wool trading is for you, and whether you can afford to mitigate the risks of wool trading.
Contents
Reasons You May Trade Wool
Traders should consider buying wool for the following reasons:
- Bet on Emerging Market Demand
- Inflation Hedge
- Portfolio Diversification
Important: This is not investment advice. We present a number of common arguments for and against investing in this commodity. Please seek professional advice before making investment decisions.
Bet on Emerging Market Demand
Fashion and consumer preferences play an important role in determining wool prices. Trends in these areas in the emerging market seem favorable for the commodity.
China has a GDP of over $13 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.
Wool As An Inflation Hedge
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.
Wool For Portfolio Diversification
Most investors 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.
Ways To Trade Wool
Investors have a very limited number of easy options for gaining exposure to wool prices.
Are There Wool Futures?
The Australian Securities Exchange (ASX) offers two different futures contracts 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 and trades between 10:30 am and 4 pm. Contracts have expiration months of:
- February
- April
- June
- August
- October
- December
How Do Wool Futures Work?
Futures are a derivative instrument through which investors 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.
Trading futures requires a high level of sophistication since factors such as storage costs and interest rates affect pricing.
What Are Wool ETFs & Shares?
ETFs are exchange-traded funds. These financial instruments trade as shares on exchanges in the same way that stocks do.
Currently there are no ETFs that offers pure-play exposure to wool prices. Traders interested in wool trading and ETFs should explore general agricultural commodity ETFs.
Likewise for stocks, there are no exclusive wool company stocks on the market at the moment.
How To Trade Wool CFDs
One way to trade wool is through the use of a contract-for-difference (CFD) derivative instrument.
CFDs allow traders to speculate on wool prices without owning the asset. The value of a CFD is the difference between the price of wool at the time of purchase and its current price. Learn more about CFDs in this CFD Trading Guide.
Some regulated brokers offer CFDs on wool. Customers deposit funds with the broker, which serve as margin.
The advantage of CFDs is that investors can have exposure to wool prices without having to purchase shares, ETFs, futures, or options.
IMPORTANT: CFDs are not available in the USA due to local regulation, and regulated brokers do not accept US citizens or US residents as clients.
Where Can You Trade Wool?
If you are looking to start trading wool and other agricultural commodities, here’s a list of regulated brokers available in to consider.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74%-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.
Should I Trade 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 suitable diversification, the basket may 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 and adds diversification to a portfolio.
There are two specific trends that could boost wool prices in the years ahead.
Innovation In Wool-Producing Technologies
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 & Wool Demand
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.
What Are The Risks Of Trading Wool?
However, investors 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.
Important: This is not investment advice. We present a number of common arguments for and against investing in this commodity. Please seek professional advice before making investment decisions.
Further Reading
To learn more about the basic qualities and production processes of wool, see this Wool Commodity Guide.
Commodity.com has a variety of other agricultural commodity trading guides, like on coffee, cocoa, oats, live cattle, and lean hogs.
