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Wednesday, November 25, 2015

Has merino wool production stopped falling in Australia?

By Andrew Woods, ICS  |  Source: ABS, AWPFC, MLA, AWC, WI, AWEX, ICS

Key points

  • Dry seasonal conditions have maintained sheep offtake in the Australian flock at 12-14% this season.
  • Such a high sheep offtake indicates further downward pressure on the Australian flock size.
  • The lamb offtake in Australia can be explained very well by a rolling average of lamb to wool prices, lagged by a few years.
  • Lamb to wool price relativities point to a continued high lamb offtake in the next 2-3 years.

2015-11-25 Wool Pdn FIG 1

2015-11-25 Wool Pdn FIG 2

Wool supply to the market has fallen again this season. In August, Mecardo reviewed flock and wool production forecasts and, with some of its own modelling, concluded that the flock would increase slightly this season, providing a solid base for wool production. So, what’s caused the variance between the August expectations and what is happening currently?

In July, Mecardo discussed adult sheep turnoff in the Australian flock, providing some possible scenarios for this season based on rainfall. Average rainfall across sheep regions the past 6-12 months has been on par with year earlier levels, below median and well below average levels. As a consequence, sheep offtake has remained at levels that flag downward pressure on the flock size (that is, above 10-11%).

Figure 1 shows the sheep offtake (the rolling 12-month sale of adult sheep to abattoirs expressed as a proportion of the flock size) for the past three decades, along with the official AWPFC estimate of the opening flock size. The shaded areas show where the sheep offtake was below 10.5%, coinciding with a build-up in the flock size.

The rolling 12-month sheep offtake remains above 12%. The annualised September offtake was close to 14%, with the October annualised offtake falling down to around 11.6%. A dry spring in many of the southern regions has maintained the downward pressure on the flock size, despite favourable price relativities between wool and crops.

A second factor is operating on wool production, and that is the breed breakup of the flock. Figure 2 shows a comparison between a rolling six-year average of lamb to wool prices (lagged by a couple of years) and the lamb offtake of the flock (the rolling 12-month total of lambs sold to abattoirs expressed as a proportion of the flock). The lamb to wool price ratio has an extremely high positive correlation with the lamb offtake. The rise in lamb offtake reflects a switch in focus to lamb to wool production.

The lamb to wool price ratio is lagged by a couple of years to provide some forecasting skill. The lamb to wool price ratio has increased in recent years. As such, we can expect the lamb offtake to increase in the next 2-3 years. This points to an internal downward pressure on wool production within the Australian flock.

What does this mean?

The title of this article is, 'Has wool production finished falling in Australia?'. The answer to this question looks to be a 'No', a result of the continued dry conditions and high lamb to wool price ratios. Merino wool production is going to continue easing, until we have a couple of average or better season conditions. This seems likely to help keep merino prices at levels we have seen in recent years.  Crossbred wool production is also under pressure this season. This reflects dry conditions again in western Victoria and south eastern South Australia plus lower clean fleece weights in central NSW. This will help prices, although Australia is one of many crossbred producers in the world.

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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