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Wednesday, July 13, 2016

A quick review of supply and micron premiums and discounts

By Andrew Woods  |  Source: AWEX, ICS

Key points

  • Fine wool volumes have remained above year earlier levels during much of the past year, keeping the downward pressure on premiums.
  • Broad merino volumes have been lower than year earlier levels, helping squeeze the prices for the broader merino categories together.
  • The wool market is sensitive to changes in the supply of different categories so any change in the supply of fine or broad wool will be reflected in price.

2016-07-13 Micron Supply And Basis Fig1

2016-07-13 Micron Supply And Basis Fig2

2016-07-13 Micron Supply And Basis Fig3

Micron premiums and discounts remained bunched tightly together for merino categories. For fine wool growers this is not such a good thing, while for broad wool growers it is helping lead to all-time highs in nominal terms. This article takes a quick look at the current situation with regard to supply and micron spreads.

Figure 1 shows an update of a graph shown in an earlier article. It compares the supply of 16 micron and finer wool expressed as a proportion of the merino clip, from 2004 onwards, and the 16 to 21 micron premium, on an annual basis. The data for the 2016 calendar year to date is highlighted (black dot). The supply of 16 micron and finer wool has continued to be around 3.5% of the merino clip, and consistent with the relationship displayed in figure 1 the basis or premium has remained at low levels.

Figure 2 shows the change in a rolling 12 month cumulative supply for 16 micron and finer wool, from 2004 onwards, along with the rolling change in the 16 to 21 micron premium. When the volume increases, the premium comes under downward pressure and usually shrinks. When supply falls (which has not happened a lot during the past 12 years) the premium often picks up. Supply started to fall in the autumn of 2015, but picked up again as seasonal conditions deteriorated. The premium has remained at low levels during the past year, despite only a relatively small increase in supply. However, figure 1 reminds us that there is ample 16 micron and finer wool around by the standards of the past 12 years, so the low premiums (in relation to a super strong 21-micron category) have remained low.

The corollary to the fine wool supply situation is shown in Figure 3. It shows the year on year change in the rolling 9 month cumulative volume for the 22 to 24 micron categories (merino wool only) along with the year on year change in the 23 to 20 micron discount, from 2004 onwards. The relationship between the change in supply and basis is not as pronounced for the broad merino category as it is for fine wool, but the graph shows we need to know what is happening to supply in order to help understand what is going on in the broader micron basis. As the supply of broad merino wool increases the basis (a discount) tends to widen, and when the supply of broad wool falls, as it has a lot in recent years, the basis narrows.

So, where to from here? The past three seasons have had weighted average rainfall ranks in the 30-40% range, so even a median year would see the fibre diameter of the clip broaden. Reasonable rainfall in the spring would see the supply of 16 and finer wool start to fall year on year. By the second half of the 2016-17 season premiums would start to respond to changes in supply. The broad merino supply and consequently discounts should also be adjusting. There will be some grower stock of fine wool to sell down, so planning on fine wool premiums bouncing back this spring has a good chance of being premature.

For anyone who has followed the greasy wool market closely, they will know it is extraordinarily sensitive to changes in the supply of different types. Therefore given a change in the supply of fine and broad wool based on seasonal conditions, premiums and discounts will adjust.

What does this mean?

Seasonal conditions are well set for a good spring, but we have been in this position before. With this caveat in mind the prospects for a broadening of the clip in 2017 are good. There is also the impact of changed breeding intentions which will be a result of the extended period of low fine wool premiums. Fine wool producers looking for premiums to rebound quickly will have to wait for production to change and for grower stock to be sold down, which points to 2017 rather than the coming spring. For broad merino wool producers prices are probably as good as they get.

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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