Earlier this year, the British Wool Marketing Board (BWMB) predicted a slight increase in prices for the 2015 clip over supplies last year.

With demand stable, and a good clearance of wool at the last of the auctions for 2014 clip, everything looked reasonably positive for the season ahead.

However, it now looks as though that prediction was optimistic, with prices moving down, which will be reflected in the wool cheque going to producers in 2016. “The top-up could be down 15% next year. Certainly, the price will be less. The question is how much less,” said Ian Hartley, the chief executive of the British Wool Marketing Board.

It highlights just how difficult it is to predict the market for any commodity – even the best informed can get it wrong.

A reasonably positive view of likely prices saw the board go in at their first auction in early July at an indicator price of 146p/kg for greasy wool. However, a 65% clearance rate suggested the price at which the board was willing to sell was too high. The next two auctions saw indicator prices revised downwards at 139p/kg and 133p/kg, but produced clearance rates of only 58% and 61%.

The most recent auction in early October had the highest clearance rate for the 2015/16 season to date of 88%, but at an indicator price of 120p/kg, the lowest indicator price for greasy wool since late 2012.

“Hopefully, we have now found where the market is,” said Hartley. Despite selling the majority of UK produced wool (30m kilos per year), he maintains that the board is not in a position to hold out for higher prices. “We are relatively small in the global market. We can’t affect global prices,” he argued.

With wool continually coming into store, holding product leads to additional storage costs, which ultimately reduces payments to farmers. His view is “we have got to keep selling”.

So, why has the market turned downwards? Like many other agri-food commodities, the price of wool is strongly influenced by Chinese demand. Approximately 35% of the UK wool clip ends up in China. However, the major factor is not a drop-off in Chinese buying, but currency fluctuations, particularly around the New Zealand (NZ) and US dollar.

Wool is traded into China in US dollars and, a year ago, a NZ dollar was worth US$1.25. It is now worth US$1.58, making NZ wool very price-competitive in the Chinese market.

With no organised selling structure in NZ, the country has a reputation for pushing product on to the market, and often selling too cheap. This is putting pressure on the global market for wool.

Also a factor in the market is the price of oil, which effectively determines the price of synthetic fibres. These now account for nearly two-thirds of world fibre production. Lower manufacturing costs lead to lower prices for synthetics, which will take down the prices for all fibres, including cotton and wool.

However, Hartley is confident that the market for wool will turn relatively soon. There is no increase in supply in any of the major wool-producing countries and world supply is generally falling. With supply and demand for wool generally in equilibrium, simple market economics suggest that if supply falls behind demand, it will lead to higher prices.

Tight environmental controls mean that there are now only two companies remaining in Britain who clean greasy wool. The process, known as scouring, is undertaken by Bradford-based companies, Howarth Scouring Company and Thomas Chadwick and Sons.

They handle wool from Britain and Ireland, as well as Europe and further afield. At one point Bradford was home to six scouring plants. Now, the next major European scouring operation is located in the Czech Republic.

The reason for the strict controls is the use of water to clean wool. The process removes dirt and impurities, which must then be removed from the water via effluent treatment facilities. New systems and technology, allowing water to be recycled, has reduced water demand at British factories to less than four litres of water per kilo of wool. In New Zealand, a scouring plant uses 10 to 20 litres of water per kilo, while in China it could be as high as 50 litres of water.

“European environmental controls are getting tougher all the time and it requires a lot of investment. Our customers now demand good environmental practice,” said Daniel Isbecque from the Howarth Scouring Company.

His company buys approximately 50% of the wool sold by the BWMB, and has major customers in the UK making carpets, and customers all over the world making upholstery, insulation, etc. The company also has a combing plant on site, supplying high-quality wool used to make high-quality garments, for example. It is the only combing plant in northwest Europe.

However, with strong demand for greasy (unscoured) wool from China in recent years, and cheap processing costs, there is no room for inefficiency. Howarth is a high-volume, low-margin business, and offering a good service is part of retaining existing customers.

There were times in recent years when it would have been financially attractive for the BWMB to bypass local scourers by selling all raw product direct to China. That would have put both UK scouring companies out of business but, in the long-term, the board needs the scouring plants and vice versa. Without the scouring companies, there is no outlet during a disease outbreak (the UK was banned from exporting greasy wool during the Foot and Mouth outbreaks of 2000 and 2005). In China, stricter environmental controls are pushing up the cost of scouring. “We need the scourers and they need the board for continuity of supply,” confirmed Ian Hartley.

The British Wool Marketing Board was set up in 1950 and aims to work to co-operative principles by passing returns to farmers via their wool price.

The organisation is run by farmers with nine regionally elected board members, along with two representatives appointed by Defra. Current board chair is Dungiven farmer Ian Buchanan.

Under statutory legislation, the Wool Board is required to collect wool from anyone with more than four sheep. It has a network of 11 depots where wool is graded and sorted, supported by a further 14 intermediate depots.

All but three of the main depots are owned by the board. One of the depots not fully owned is at Muckamore in NI where the depot is 50% owned by the board and 50% by Ulster Wool Growers.

In total, the Wool Board employs 35 people at its head office in Bradford and 230 in the various depots.

They handle approximately 30m kg of wool per annum. Wool is sold under an auction system, conducted 18 times per year.

Producers in Northern Ireland receive an advance of around 30p/kg when they supply wool and the balance the following year, once all the wool is sold and costs are deducted.