Mecardo Analysis - Fine wool volumes rising
- By: "Farm Tender" News
- Ag Tech News
- Oct 09, 2018
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By Andrew Woods | Source: AWEX, ICS.
Two weeks ago Mecardo looked at ultra-fine merino prices, finishing the article with a comment that rising supply would most likely put downward pressure on prices. The latest AWTA volume data for September showed some big increases in sub-17 micron volumes. This article takes a look at price premiums and volume for sub-17 micron wool.
To establish a relationship between price and supply requires smoothing the volume data out. In this article the rolling 12 month totals are used for volume to smooth the data. We then look at the change in these rolling 12 month series. This method improves the correlation between volume and price markedly. It seems to mimic the way the supply chain views supply, from a seasonal point of view rather than week to week or month to month.
Figure 1 compares the year on year change in the price premium for 15 micron fleece to the average merino micron price, and the rolling 12 month total of supply for 15 micron and finer wool. The change in volume is strongly negatively correlated to change in the premium. The relationship broke down in the 2013-2016 when the premium fell to low levels so rising volumes could not force the premium lower.
In the latest AWTA data 16 micron and finer volumes lifted markedly. Extra wool for these categories is now flowing in from the dry regions in the normally higher rainfall areas of eastern Australia, in particular in NSW. This increase is reflected in the recent increase in the rolling 12 month supply of 15 micron and less wool in Figure 1, which has been below year-earlier levels since mid-2017. The effect of drought will continue to push this supply up through to mid-2019, at least. Figure 1 shows how such an increase in the supply will push the rolling 12 month average premium to start falling compared to year-earlier levels.
Figure 2 shows the 15 micron basis in Australian cents per kg terms to the average merino micron price. A rolling 12 month average is overlaid on the premium series. It shows how the monthly premium has fallen since early 2018, even while the rolling 12 month average was still rising. Keep in mind the rolling 12 month average gives an idea of how the supply chain is seeing the price difference or premium.
Figure 3 repeats the analysis of Figure 1 for the 16 micron premium, using 16-17 micron volumes as the supply data. It clearly shows the premium coming under downward pressure this year as the year on year change in the cumulative supply has risen. Supply does not explain all of the change in premium, but over time it is the key driver. It also has the advantage of being able to be measured.
Key points
* The rolling 12 month cumulative supply of sub 16 micron wool is now rising compared to year-earlier levels.
* Rising cumulative levels of supply point will push the premiums for 15-16 micron downwards.
* This is a trend which will persist through to mid-2019, at least.
What does this mean?
An increase in fine merino volumes has been anticipated due to the dry conditions in eastern sheep regions. This is starting to happen in earnest now, as the production from the higher rainfall regions in eastern Australia, which is finer to start with, shows the effect of drought. This trend in supply will persist through to at least mid-2019, therefore the downward trend on fine wool premiums will persist for the same time.
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