Selling raw wool by forward contract: A qualitative analysis of the pros and cons

Australian farmers have been warned of increases in wool auction price fluctuations since 2000 (Kingwell), yet 85% of producers continue to sell their wool on the highly volatile, open-cry auction system (Bolt 2004). It has been suggested that forward selling is one method available to farmers to manage price risk and stabilise income (Liddle 2004). This research is a qualitative analysis of the pros and cons for forward contracting. Focus groups were conducted in regional Western Australia to gather the opinions of wool producers to assess why this selling method, despite its advantages, is over-shadowed by the auction system. Results suggest that income stabilisation and price risk management were the two major pros of the forward contract method of selling raw wool although these were strongly over-shadowed by the list of cons: pricing, complexity, dominance of the auction system and production risks.