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Thursday, June 05, 2014

Less wool again in May

By Andrew Woods  |  Source: AWTA

Key points

  • AWTA wool volumes still down by 2.9% in May, but steadied after plunging in April.
  • The trend for increased fine wool production is slowing, but there is a backlog of fine wool for the supply chain to use.
  • Broader merino wool supplies should mirror the trend in fine wool, gradually working their way to year-on-year increases late in 2014 (given adequate rainfall).

2014-06-03 AWTA Volumes May 2014 FIG 1

AWTA volumes, while still falling by 2.9%, steadied themselves after a big drop in April. The trends seen during the past year are moderating although lower sheep numbers will continue to limit Australian wool supplies. This article looks at the latest supply data from the AWTA.

Figure 1 shows the change in volumes for wool tested by the AWTA in May compared to May 2013 and for the season to date (July to May) compared to the same period in the previous season. The data is broken down by micron categories, with the total change shown on the far right.

While the increase in fine wool is subsiding, the season to date volumes are high (40-50% for 16 micron and finer). This explains why prices for these categories are under so much pressure. Imagine what would happen to wheat prices if the major wheat producers in the world increased production by 50% in one season. The supply chain needs time now to absorb the increased supply of the past year before we can expect fine wool premiums to show much strength.

The continued fall in the 19 and 20 micron categories seems to be reflecting lower sheep numbers. These categories have tended to have relatively stable production, with the finer and broader merino categories rising and falling in response to changing seasonal conditions. Lower core micron volumes reflects a smaller flock, and this trend will continue through the rest of 2014.

The fall in 21 to 23 micron merino wool should also subside in coming quarters, and eventually swing to year-on-year increases. Supply remains below year earlier levels for the time being.

Fine crossbred volumes are stable. This seems to be a combination of prime lamb numbers holding and finer combing crossbred wool, which is a consequence of the tough seasonal conditions. The big combing crossbred categories (27-30 micron) are lower largely as a result of seasonal conditions pushing this wool finer, by up to 0.7 micron during the past year.

What does this mean?

Change in the volume of supply is sometimes forgotten as a key influence in commodity markets such as wool, especially when the cycles play out across a number of years. The current cycle of increased fine wool and decreased medium/broad merino wool is waning. Adequate rainfall in the next 4-5 months is required for this process to continue.

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