Mecardo Analysis - AWTA volumes over time

By: "Farm Tender" News
Ag Tech News
May 09, 2019
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By Andrew Woods | Source: AWTA, AWEX.

This article is bought to you by GE Silos.

Existing production trends in Australian Wool Testing Authority (AWTA) core test volumes persisted in April. This article takes a look at these trends by micron category and their effect on the micron price curve and through that, the price structure of the greasy wool market.

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Figure 1 shows the year on year change in AWTA core test volumes by micron category for April and the three months to April (February to April). The three month period smooths out variations in working days due to Easter and logistical variations in wool travelling from the sheep’s back to store.

18 and 19 micron volumes are relatively unchanged, which makes sense as the average Merino fibre diameter is around 18.5 micron. 17 micron and finer volumes are well above year-earlier levels and 20 through to 23 micron (the broader Merinos) volumes continue to be well below year-earlier levels (which were already below their year-earlier levels in the autumn of 2018). The main crossbred micron category volumes are also down, with finer crossbred volumes slightly up on the three-month measure.

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Figure 2 shows a longer-term view by comparing the season to date volumes to the same period a year earlier and to the average of the past five seasons (same period). Normally some 86% of the Australian clip in farm bales terms has been tested by the end of April. This figure shows the deep drop in 21 and 22 micron volumes, down some 40% on the earlier season and the rolling five-year average. Australia accounts for around two-thirds of the worlds' 21 micron supply, so a big drop in supply here means a big drop in the world supply. The effect is slightly less for 22 micron where Australia accounts for about half of production and more so for 20 micron where it accounts for 70% of production.

2019-05-09 Wool 1

In Figure 3 an average price series for sound, combing fleece by micron category is shown. The data is from last weeks' sales in Australia, so it is only a snapshot of the price structure in the greasy market. Keep in mind price structures in the greasy wool market are remarkably sensitive to changes in supply. Despite the criticism that is levelled at the auction system, it is extremely efficient at adjusting price to match supply and it is transparent, which is not the case with private treaty sales.

Note the hump in price around 21-22 micron. This is a function of the drop in supply shown in Figures 1 and 2. That hump will subside when the fall in broad Merino volumes ends. In the meantime it has made crossbred prices look cheap, stimulating the strong rally in crossbred prices which began in late 2018.

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Key points

* Existing trends in wool production persisted in April - more fine Merino wool, less broad Merino wool and less crossbred wool

* The drop in Merino volumes is substantial across a range of timeframes - one month, three months, twelve months and five years.

* The drop in broad Merino volumes has translated into an elevated broad Merino price - a 'hump' in the micron price curve

What does this mean?

Prices in the greasy market respond to supply, changing very quickly as supply changes. It is a very efficient market in these terms. In the case of Merino micron categories, the change in production between categories is slower moving. Nonetheless, prices adjust accordingly. The challenge from the farmer perspective is to understand that the relatively high broad Merino prices we are currently seeing (in relation to fine Merinos and cardings) are a function of undersupply and will change with time as supply changes.

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