By Andrew Woods | Source: AWTA, AWEX, SGA, ICS
Australian Wool Testing Authority (AWTA) core test volumes provide an excellent record of raw wool production in Australia. Thankfully the AWTA makes this data available to the industry which allows us to develop a good understanding of the main supply levels for Australian raw wool. This article goes a step further in using the AWTA data to understand some current price structures in the greasy wool market.
The wool supply chain is entails much planning and shipping or wool in various stages of manufacture around the world. Greasy wool orders operating in the market today are the result of cumulative decisions taken during the past couple of years. To understand how supply is influencing the market we need to view the market like the supply chain. One way of doing this is to look at the cumulative changes in supply during the previous 12 months. Supply which can jump around from month to month starts to change the price structure of the market when the cumulative change in supply builds.
Figure 1 shows the change in the 12 month cumulative volume of 17 micron and finer wool, as measured by the AWTA, and the 12 month change in the 16 micron premium to the average merino micron price. Changes in the supply as measured this way explain between half and two thirds of the change in the price premium. The recent increase (in 2017) in fine wool premiums shows up in Figure 1, with the cumulative supply falling modestly. The fine wool supply was expected to fall in a similar magnitude to 2011, but this expectation was not met.
Figure 2 uses the same methodology to look at the broader side of the merino micron distribution, looking in particular at the 23 micron discount to the 20 micron indicator. Changes in the cumulative 21-23 micron supply for most of the past decade has been in the negative, reflecting a massive contraction in broad merino wool production in Australia. In 2017 the year on year change in cumulative supply for 21-23 micron wool has been the strongest in over two decades. As a consequence the 23 to 20 MPG discount has widened, as it did in 2011-2012 when supply last increased.
From the late 1990s to early in the current decade there was a strong trend to lower micron in the merino clip. In recent years genetic breeding data shows this trend to be lessening. How this plays out in terms of changes in the supply of the different micron categories is unclear at this stage. However the continued fall in supply shown in Figure 2 is likely to change to a more even mix of rises and falls, driven by seasonal conditions.
While the 21 MPG has held up magnificently in 2017 in the face of big increases in supply, the broad merino discounts have responded to the increased supply by widening. Fine wool volumes continue to be only modestly below year earlier levels. As the earlier article by Mecardo this week discussed, this trend is likely to reverse in 2018 thereby putting downward pressure on fine wool premiums. Looking into the coming decade the wildcard is the trend in the merino fibred diameter, which has been falling for two decades and now looks to be reversing.
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