By Andrew Woods | Source: AWTA, AWEX, ICS
Earlier this month Mecardo looked at 16 micron premium to the median merino micron category, showing that the proportion of 16 micron wool in the clip (supply) is a major driver of premiums operating in the market. This article looks at 16 micron premiums to 21 micron, rather than the median merino micron category, in response to a question from a South American reader.
Figure 1 compares the premium of 16 micron fleece wool to the 21 MPG with the proportion of 16 micron wool in the clip, from 2004 onwards. The relationship is very similar to those shown in the earlier article. As the proportion of 16 micron wool increases the premium to the 21 MPG falls. The trend fitted to the data shows that supply explains around 86% of the premiums. This relationship holds also for longer term data back to the mid-1990s, with the 1999-2002 fine wool boom removed.
The back story is a little more complicated with this relationship as the bulk of the Australian merino clip has migrated from 21 micron two decades ago to 19-19.5 micron now. As the supply of 16 micron wool has increased, the supply of 21 micron wool has decreased. So, the proportion of 16 micron wool in the clip is acting as a proxy for both the rising supply of 16 micron wool as well as the falling supply of 21 micron wool.
From the trend developed in Figure 1 we can set up a model for the 16 micron premium, based on the 16 micron supply. Figure 2 shows the actual 16 micron premium to 21 micron (calendar year averages) from 2004 through to 2015. The shaded area is the trend model developed from Figure 1 (with a two standard deviation channel). The two standard deviation spread in the model means the actual premium is likely to be within 12% of the calculate trend. Within years therefore, other factors such as grower stocks, fashion cycles, economic growth can push the premium up and or down by 12%.
Between years it is quite easy for the proportion of 16 micron wool in the clip to change by 0.5%. So if we are looking into 2016-17 variation in the 16 micron premium to 21 micron can come from a combination of change in the proportion of 16 micron wool in the clip and the 12% variation in premium which is inherent in the model.
Figure 3 has a schematic to shows this possible, short term variation in the premium. In 2015 the average premium was around 17%. The schematic in Figure 3 shows that at best next season, with a drop in supply and pickup in demand the premium could lift to around 40% or at worst, with continued increases in supply and lacklustre demand continue to trawl along at very low levels. From a seasonal perspective we are starting from a dry base, so the probability is skewed towards a fall in supply through 2016-17.
The 16 micron premium to the 21 MPG is primarily driven by the supply of 16 micron wool, then fine tuned with other factors. An obvious exception to this is the 1999-2001 fine wool boom, which was largely a function of demand and exchange rate factors. Prices then held on in 2002, as the wool market went through a post stockpile price cycle.
Looking into 2016-17, the base level of 16 micron premiums will depend on the supply which in turn will depend largely on seasonal conditions. Australian wool production is starting from a dry base, so the probability is skewed towards improved conditions therefore lower fine wool supplies and firmer premiums.
However, first things first, Let the rain fall.
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