Mecardo Analysis - AWTA volumes falling early and heavily
- By: "Farm Tender" News
- Ag Tech News
- Dec 04, 2018
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By Andrew Woods | Source: AWTA, ICS.
While broad Merino production has been well below year-earlier levels from most of 2018, the core Merino categories are starting to fall. This article takes a look at the supply pattern around past major droughts and looks at what is happening this season.
In past major droughts, greasy wool supply tended to show the effects in the second half of the season, after the failed spring, and beyond. Figure 1 shows the cumulative change in volumes, as measured by AWTA core test data in farm bales, starting from July in the years 1994, 2002 and 2006. Each of these years was a major drought in eastern Australia, not necessarily in every region but widespread. The lines for each year show the cumulative change in volume starting in July and running forward for 18 months, to the end of the following calendar year. The July and August changes are volatile as they are for one and two months respectively. As the number of months included in the cumulative change, the underlying pattern settles down.
In 1994 and 2002 the overall flock size was still under downward pressure as farmers switched enterprises. By 2006 this background trend of falling sheep numbers was starting to end, with the flock size stabilising. Consequently, the subsequent fall in cumulative volume following 2006 was much smaller than following the earlier droughts.
Figure 2 compares an average of Figure 1 to the current season, beginning in July 2018. In contrast to the earlier periods, supply in 2018 began falling at the beginning of the season, some 6 months earlier than the historical precedent. The question the industry faces now is whether the current fall in volume is simply the normal post-drought fall in volume brought forward, or it is going to be compounded by further falls in 2019. This question does not apply to Western Australia as Western Australian production began falling in early 2018, so by early 2019 it should steady and take some pressure off the national clip. That still leaves a big question on supply for the eastern 80% of the Australian clip.
Why this pattern of supply changes is occurring lies in a mix of seasonal conditions (current and prior), relative commodity prices and flock structure (age, gender and breed). However, for a supply chain which generally relies on wool being offered for sale this year much in line with last year, the niceties of why the change is happening will be of much less interest than an adequate explanation of what is going to happen with regards to supply.
Key points
* Normally the overall wool supply starts to fall in the second half of a season following a severely dry spring.
* In 2018 total; supply began falling early in the first half of the season, some six months earlier than normal.
* This markedly increases the uncertainty about greasy wool production levels in 2019, mainly for eastern Australia.
What does this mean?
Generally, changes in wool production are reflected in the auction market (very quickly, which means it is efficient, despite the criticism thrown around about this market) in changing relative prices – premiums and discounts. The current fall in total volume is an unusual pattern and given the lack of supply management in the supply chain, it is hard not to see this fall in supply catching the supply chain by surprise. At the very least price volatility is going to increase.
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