This section describes the processes a buyer goes through pre-sale, to determine a bid price. That is, What needs to be considered to determine an auction bid. In this case our buyer was prepared to pay a maximum of 1127 for a lot that sold for 1200.
We will look at how a buyer converts the price that he believes he can sell the wool for, to a bid in the auction room, and what processes they need to go through to 'market' the lot.
While the broker has only valued this lot in generic terms, the buyer generally needs to value the lot in relation to his client/mill requirements. In other words the buyer needs to be more specific to the various needs of each client. However in this case the buyer has valued the lot also as a straightforward lot.
The day before the sale the buyer usually:
- Enters his type for the lot into his buying software. In this case the buyer was using one of our mobile valuing devices that provided additional data to that displayed in the printed catalogue - for example sampling date, previous offering information etc.; and this was automatically loaded in the buyers bidding system.
- Electronically sends all relevant lot data to his clients - all test data for the lots, the buyers valuations converted to the client’s types - for ease of interpretation for mills etc. – and other data that may assist in finding a market for the sale lots.
On the morning of the sale, the buyer may do any number of things in preparation for the sale:
- Receive information from potential buyers on what they are prepared to pay for different types of wool.
- In some cases the overseas buyer may select individual lots with a specifed price.
- This information is also fed into the buyers systems to produce a bidding catalogue. This bidding catalogue may be in electronic form (notebook computer, iPad etc.) and is then used as a basis for bidding. The electronic version allows bidding pricing to automatically be altered as the sale progresses.
Now back to the actual selected lot.
- In this case the buyer had 5 potential clients, with prices ranging from 1494 to 1270 clean c/kg. These are the prices that the buyer believes that if he bought the lot, he could sell at that price, once other costs such as dumping, shipping etc. are added. More information on this later.
- Now the auction does not work in clean prices, so the buyer converts the prices to greasy bid prices – i.e. the price the grower gets paid.
Now what happened to convert these prices to greasy:
- The buyer needs to take into consideration costs such as – dumping, shipping, commission, insurance etc. – in this case it was 34.01 greasy c/kg. These will be covered in the next section.
- The yields of the lot – each potential client may use different yields! But let’s just say that they all used the basic Schlumberger yield @ 80%.
- Now the broker also charges the buyer a fee (refer below) in this case it converted to a greasy cost of 26.50 greasy c/kg.
- So let’s take the top price of 1494 clean c/kg. If we use the 80% Schlumberger yield, and make allowance for buyers costs of 34 greasy c/kg for dumping, shipping, insurance etc. and then the brokers fees, we arrive at a maximum greasy bid price of 1194.
- This is all automatically calculated by buyer’s software.
As stated earlier, these costs are for one buyer, one client etc. There are many different costs structures, risk factors etc. that change daily. See also the Buying - Other Trades.
Now of course it is not as simple as that for the buyer.
- Most trades are done on container loads – say 108 bales.
- There is also competition, and the buyer may make a profit on one lot and a loss on another.
- The buyer may be well on the way to fill a container of wool and needs just another 10 bales, so he may be willing to pay a bit more to ‘complete the contract’.
- Or he may have been buying lower than he expected, so he has some ‘spare money’. He may be willing to take a loss to keep the contract - many more scenarios.
- Most buyers use software systems to assist and manage this process while the sale is going on.
In this case the buyer missed out on the lot, as shown above the buyer was willing to pay a maximum of 1194 and the lot sold for 1200.
Next we will take a closer look at those post sale costs such as dumping and shipping; and later still we will take a closer look at those buying costs and strategies for the rest of the sale after missing this lot.
Buyer Fees - sometimes called the Post Sale Charge (PSC) - brokers charge buyers a fee for each lot sold. Whilst it is not clear what this cost comprises, it is assumed it covers AWEX selling fees, auction room costs, printing of catalogues etc. As it is a $/bale cost, the lighter weight bales will result is greater discounts to heavier bales etc.