Mecardo Analysis - Micron premiums and discounts - proportional

By: "Farm Tender" News
Ag Tech News
Jul 09, 2019
507 views
Share

This article is bought to you by Wallaloo Park Merinos

By Andrew Woods | Source: AWEX, AWRAP, ICS

The ratio of commodity prices explains a lot of the changes seen in commodity production through time, which is really stating the obvious that farmers respond to price signals when making decisions about their mix of enterprises. This article carries on from last week and looks at Merino fleece micron premiums and discounts in proportional terms.

Figure 1 shows a breakup of Merino fleece micron premiums and discounts in a similar format to the article from last week except that the premiums and discounts are in percentage (proportional) terms. The four micron levels are +4,+2,-2 and -4 microns around the average merino micron category, which is currently 18.5 micron. The per micron premiums shown in Figure 1 are cumulative in order to show the actual per micron effect if looking at 4 micron finer or broader than the average fibre diameter.

Ad - Inspect the latest Wallaloo Park Rams at the Bendigo Sheep Show. Click here for more - Ad

In proportional terms, Figure 1 shows a different story to that shown in the absolute (c/kg) premiums discounts last week. The recent 2017-2018 cycle of larger premiums and discounts is far more muted in proportional terms, due to the high base Merino price. In absolute terms, the 2017-18 premiums were on par with the 2011 cycle but in proportional terms, it was a small cycle, well below the levels seen prior to 2012. Broad micron discounts in 2016-17 in proportional terms were on par with past periods of wide discounts – nothing special, unlike the absolute discounts which were large by historical standards.

To simplify Figure 1, average premiums and discounts for the past three decades, the past seven years and the past five years are shown in Table 1. These averages are taken directly from the data used to produce Figure 1. Keep in mind they are per micron premiums and discounts and are not cumulative. For example, in the 1990s the 4 micron finer premium to the average micron was (34%+ 14%) times 2 = 96%.

2019-07-09 Wool 1

During the past three decades, the magnitude of the premiums and discounts has declined. The per micron price effect continues to increase as fibre diameter decreases but at a lower rate. The five and seven-year averages have been added to Table 1 as farm decisions on enterprise mix are more likely to respond to changes in relative prices after five years. That statement comes from the experience of modelling Australian farm production using relative prices as inputs to models. The small (average) premiums and discounts for micron during the past five to seven years points to Australian wool producers at least steadying the downward trend in fibre diameter of recent decades or more likely an increase in average fibre diameter. It will take a couple of reasonable seasons for this to become clear.

In an ideal world, we should be able to adjust for changes in supply when looking at micron premiums and discounts. The ever-shifting fibre diameter results in substantial changes in the volume of micron categories finer and broader than the main, average categories. These changes in supply are big drivers of micron premiums and discounts. Seasonal conditions are the driver of swings in the micron category, in the main, which is in turn driven by rainfall. Figure 2 shows the average rainfall rank for sheep regions from the early 1990s onwards. In the past seven seasons, we have had one season about median, one well above median (wet – 2016-17) and five well below median seasons (dry). This suggests that premiums and discounts from the past five to seven years are biased to being small because it has been dry.

2019-07-09 Wool 3

Key points

* Relative micron premiums and discounts have been shrinking for the past three decades.

* Micron premiums and discounts in the past five to seven years have been very small (on average).

* Dry seasons in five of the past seven years leads to a bias of the micron P&Ds to being small.

Ad - Inspect the latest Wallaloo Park Rams at the Bendigo Sheep Show. Click here for more - Ad

What does this mean?

As the article from last week discussed micron premiums and discounts vary, depending on what micron range is being analysed. Small (on average) premiums and discounts from the past seven years points to at least a steadying in the average merino fibre diameter and more likely an increase in coming years, although it will take a couple of reasonable seasons to allow this change in breeding direction to express itself in wool production. At the same time, a run of reasonable seasons would allow production to broaden slightly and in doing so widen micron premiums and discounts.

www.mecardo.com.au