However, while prices have picked up from the three-year lows experienced in early 2009, the full extent of the rise will be determined by the pace at which the world economy recovers and the level of competition from alternative fibres.

Rabobank analyst Adam Tomlinson said the discretionary nature of woollen product consumption meant wool prices would continue to be closely aligned with global economic activity.

“The premium and niche market status of wool meant that wool was one of the hardest hit agricultural commodities when the global credit crisis first started to unwind,” he says.

“As the recovery in the global economy gathers pace – although more gradual in developed economies – we expect that the desirable nature of woollen garments will remain, this should support an improving global demand outlook for wool.”

Improving global economy a turning point

The current economic outlook for world economies from the International Monetary Fund suggests that a broader improvement in economic activity will occur in 2010.

“We are expecting demand to improve with the global economy and keep wool prices above current levels in 2010 and that wool prices will also be underpinned by the increasing cost of alternative fibres,” Mr Tomlinson says.

“Oil prices – a major cost component for intermediates of chemical synthetic fibres – are expected to remain at higher levels in 2010, keeping the pressure on production costs for these fibres.”

Production to remain subdued

Wool production has been in decline for many years, as producers of wool globally switched to alternative enterprises like the production of grain or the production of other livestock products like meat or milk.

However, as the production of wool has been falling the global production of synthetic fibres has been meeting additional world fibre demand.

“We expect that global wool production in 2010 will rise slightly as better seasonal conditions and reduced input costs increase wool yields per sheep. However, this increase will remain constrained by competition from alternative farming practices.

“Notwithstanding any further supply and demand shocks, Rabobank expects that domestic wool prices, quoted as the eastern market indicator, will remain above the five-year average (AUD8/kg clean).”