Mecardo Analysis - Sales volumes move to balance price

By: "Farm Tender" News
Ag Tech News
Sep 10, 2019
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By Andrew Woods | Source: AWEX, ICS

Key points

· Clearance rates at greasy wool auctions are closely related to short term changes in price.

· Excess volumes of wool not sold (above the "standard" 15% of the past year) since May, amount to 3.7% of wool sales in the past year.

· Broad Merino micron categories had the lowest clearances in August (around 50%) compared to 70% for crossbred and fine Merino.

A falling wool market, such as we had in August, is a difficult situation made more difficult by a lack of hedge activity along the supply chain. The focus on spot, or near spot, trading means the full effect of raw material price changes flow directly into stock valuations. This article takes a look at the changes in auction clearances in response to the lower prices.

In recent years 85-90% of wool offered for sales has been sold, which means 10-15% has been either withdrawn, had no bid or been passed in. Figure 1 shows the cumulative monthly proportion of wool not sold (withdrawn, had no bid and passed in) from mid-2017 to last week. The Eastern Market Indicator (EMI) is superimposed on the graph. As the EMI rose through 2017 to mid-2018 the proportion of wool not sold stayed below 10%. As the EMI steadied from mid-2018 through to last autumn, the proportion of wool not sold varied between 10% and 20%. As the EMI eased, from autumn onwards the proportion of wool not sold rose, peaking at 39% in August.

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Figure 2 shows the same information for wool not sold, but this time compares it to the changes in the EMI compared to the average price of the preceding three months. The change in the EMI price is reversed also. It is a neat fit, with the change in the EMI explaining around three quarters of the change in the proportion of wool not sold. Supply adjusts to changes in price, without market intervention.

2019-09-10 Wool 1 2019-09-10 Wool 2

What about the passed in wool, as it has to come back onto the market and was passed at higher prices? If we use the 85% proportion sold as the "normal" base, then some 36,000 extra bales of wool were not sold in August. If we use that calculation starting from May, when the EMI was at 1900 cents, there are around 50,000 extra farm bales now sitting in broker warehouses. That equates to around 3.7% of farm bales sold during the 12 months to August, which is not a big stockpile especially given the seasonal conditions. When it comes to price, it is unlikely the EMI will return to 1700 cents anytime soon, so some wool passed at higher prices will have made a loss.

Finally, Figure 3 looks at the proportion of wool sold in August by micron category. The proportion sold is not even across the different micron categories. The broader Merino categories had the lowest clearances (around 50%), reflecting the big drop in price for these categories whereas the finer Merino and crossbreds had clearances of 70%.

2019-09-10 Wool 3

What does this mean?

Auction clearances vary with changes in price. As such, they fell heavily in August, down 36% on year earlier levels. It is not possible at this end of the supply chain to quantify the effect of lower clearances, but in a market with an already constrained and still shrinking supply of Merino wool, it will have helped to put the brakes on the price fall. The excess passed in volumes of recent months are in the order of 50,000 farm bales, which represents around 4% of auction clearances in the past year. Given the seasonal conditions, the supply chain will be thankful for this small level of stock by the end of the season.

www.meacardo.com.au