By Andrew Woods | Source: AWEX, ICS
Discounts for vegetable fault (VM) wax and wane within seasons, and between seasons, according to the level of VM present. This article takes a quick look at the current average VM levels in the clip, and then delves deeper into the data for an improved understanding of the effect of supply on discounts.
VM tends to be reported as an average. Figure 1 shows the monthly average VM levels for eastern and Western Australia, from mid-2002 onwards. As a general rule VM levels in the east are higher, coming from NSW, Queensland and northern South Australia in the main.
The big peaks in VM also tend to happen in the eastern clip (in 2006 and 2011). The strong seasonal pattern also shows up with VM levels reaching a low point around Christmas time and maximums in the middle of the calendar year. Currently the VM level in the western clip is at decade lows, while the eastern average VM is middling, at 2%.
In Figure 2 the proportion of the clip (in clean weight terms) with a VM level 1% and less is shown. This proportion has ranged from a high near 70% in 2003, to a low of 27% in 2006. Keep in mind a lot of consignments require an average VM level of 1%, so exporters need sufficient volumes below 1% in order to add higher VM wool into the consignment and still meet the required average, while meeting price and other wool characteristic targets. Such is the stuff of an exporters work day.
When the proportion of low VM wool falls to a low 30%, it is easy to see how exporters will struggle in meeting consignment average VM levels of 1%. In this instance the supply of wool with a VM of 0-1% is low, so the relative value rises by the device of increased discounts for higher VM wool. Alternatively when the proportion of low VM wool is 55% and higher, there is ample opportunity for exporters to blend to their preferred VM levels. In this instance the relative value of low VM wool falls, through decreased discounts for high VM wool. After falling to around 43% in April, the proportion of low VM wool is currently around 65% which is quite a high level. The pressure is off vegetable fault (there are still discounts but they are generally mild) as a constraining wool characteristic in the market.
While averages are an efficient way to look quickly at blocks of data, they gloss over changes to, in this case, high VM wool volumes. Figure 3 shows the proportion of wool with VM levels greater than 12%, from 2002 onwards. This category of wool only accounts from 0.5% to 2% of the clip. What Figure 3 does show is the big swings in the supply of this category of wool. In 2006, 2011 and 2016 the supply quadrupled between late spring and the following mid-year. Keep in mind that the upper section of the supply chain operates on an assumption that the supply of wool in recent years will be replicated this year. Hence an increase in the supply of 12% plus VM wool of 400% will cause its relative value to decrease, in the form of large discounts.
As expected at this time of the season there is plenty of wool with a VM level of 0-1% which allows exporters to meet consignment VM limits. Seasonal patterns show that VM levels rise from Christmas through to the May to August period where they peak. Discounts for higher VM tend to rise as this occurs.
This period becomes a challenge when the proportion of low VM wool falls to around 30%, as it did in 2006 and 2011. The level of very high VM (12%+) which is much more volatile than indicated by the overall average VM level, show rise again in 2017 given the seasonal conditions of the past couple of years so discounts for these types can be expected to open out again to wide levels as they did earlier in 2016.
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