Global funds discover Australia's golden fleece

By Michael Byrnes

SYDNEY (Reuters) - Investment funds that have ploughed tens of billions into commodities are now sniffing around Australia's small wool futures market for a new play as surging food prices begin to reduce land for grazing.

If the funds come in droves as they did in mid-February for U.S. cotton futures -- driving prices up 30 percent in just three weeks -- analysts say already-strong wool prices are likely to rise strongly.

Helped by hedge fund buying in the futures market, Australian wool prices rose by 22 percent from mid-2007 to January 23 this year, before falling by around 7 percent to around 970 Australian cents a kg.

But the strong Australian dollar means they are unlikely to reach the near-1,200 cents a kilogram record highs of early 2003, when a drought in Australia, which supplies one-third of the world's wool, produced a global shortage of the fleece.

"Supply issues or perceived supply issues have started to become critical," Peter Morgan, executive director of the Australian Wool Industries Secretariat, said.

Garry Booth of commodities broker M.F. Global estimates that international funds now account for 25 percent of open interest positions in wool futures on the Australian Stock Exchange, up from zero three years ago.

"That trend is expected to continue while the world focuses on agflation," he said, referring to commodity-price driven inflation.

The move into Australian wool futures by international hedge funds follows a surge of investment into wheat, cotton and other agricultural futures by the funds as they ride rising prices for farm products.