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Wednesday, October 28, 2015

Are the unskirted wool discounts worth it?

By Andrew Woods, ICS  |  Source: AWEX, ICS

Key points

  • Median discounts for 17 to 19 micron unskirted fleece wool have been around 1.5-2% during the past six months. Higher VM wool tends to have discounts around 4%.
  • The range of discounts around the median generally increase as fibre diameter becomes finer.
  • You never know which level of discount will apply to your wool on a given sale day.
  • The price effect for unskirted crossbred fleece has been very small, if any, during the past six months.

2015-10-27 Unskirted Discounts FIG 1

2015-10-27 Unskirted Discounts FIG 2

2015-10-27 Unskirted Discounts FIG 3

Mecardo last looked at the price effect of selling unskirted fleece wool (defined as having a D certificate and U1 or U2 fribs in the AWEX ID) in March. This article takes a look at what the price effect has been during the past six months for merino as well as crossbred wool.

Figure 1 shows the median discount for D certificate merino fleece with vegetable faults levels 2% or less sold in eastern Australia since March 2015, with fribs signified by either U1 or U2 in the AWEX ID. This is assumed to encompass non-conforming (D certificate) fleece wool with fribs (looks to be poorly skirted or not skirted). Basically, the median discount for 19 micron and finer wool has been 1.5 to 2% since March. The discount shrinks for 20 and 21 micron, back to around 1%.

As mentioned in earlier articles, this median results mask the full range of discounts that occur. Generally, the range of discounts widens as the fibre diameter becomes less. For 19 to 21 micron wool, the range in discount is between 4-5% and zero percent. For 17 micron the discounts ranged between 7-9% and zero.

The problem when offering such wool is that you do not know which discount is going to be applied on the day. A zero discount delivers all cost savings back to the grower while a 9% discount in price is most unlikely to be covered by on farm savings in preparation costs.

What about the higher vegetable fault wools? Figure 2 looks at a similar analysis for merino wool with a vegetable fault in the 2% to 5% range. As a rule, the discounts tend to increase as fibre diameter decreases, especially for the U2 frib category. For 20 to 18 micron wool with U2 fribs, the median discounted ranged from 3.5% to 4.5%.

Finally, we take a look at the effect on crossbred fleece. Figure 3 shows the median price effect of selling crossbred fleece with a D certificate and U1/U2 fribs during the past six months. The price effect jumps around with the overall median slightly negative, but essentially there is little price effect.

This may change in less of a boom market for crossbred wool. However, recent experience shows that the market does not penalise crossbred wool presented with a D certificate and fribs in the sample. A cautionary note should be made that crossbred wool still needs to be prepared to the other standards of the AWEX Code of Practice. If the sample looks to be an “all in” job, then exporters will discount the price for the risk involved. 

What does this mean?

When thinking about presenting unskirted wool for sale, assume that merino fleece will be discounted by 2% (4% for higher VM wool). If you pick up costs savings in the shed of around 1%, then given current fleece and pieces price ratios you will be about square in terms of net income with conventional preparation. The downside is that there is a range of discounts paid for unskirted wool. If you receive a hefty discount, it will outweigh costs savings made in the wool room. In this case, you need to be prepared to take the risk of passing wool in and offering again, a process for which you need a sympathetic and capable broker. For crossbred wool, the price effect of selling as unskirted fleece wool has been negligible during the past six months.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 


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