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Thursday, January 26, 2017

High wool prices – what about volume?

By Andrew Woods  |  Source: AWC, WI, AWEX, Poimena, DELTA, IWTO, ABS, MLA

Key points

  • While wool production has stabilised in recent years, merino wool production is down 66% since 1990.
  • Falling merino wool production during the past 25 years has a strong negative correlation to rising wool price premiums to prices for the major apparel fibres.
  • The poultry industry in Australia offers a different view of an industry, where productivity gains have been translated into increasing market share.

2017-01-26 Wool Fig 1

2017-01-26 Wool Fig 2

2017-01-26 Wool Fig 3

Merino wool prices are enjoying a period of high prices, both for combing and carding length types. Sheep meat prices too, are trading at high levels. The combination is underpinning good returns for sheep enterprises. This article takes a brief look at the volume trends helping to underpin these price levels.

Mecardo has looked at world sheep numbers in 2015 and at wool production in other southern hemisphere exporting countries South Africa & New Zealand. Somewhere around 2007 – 2009 sheep numbers look to have stabilised in countries (with good reporting structures) such as South Africa and Australia.

Table 1 shows a variation on a table shown in the Roberto Cardellino article. It shows the change in sheep numbers between 1990 and 2007 and from 2007 to 2014. Between 2007 and 2014 total sheep numbers have increased slightly, by around 7%. The Australian flock is shown as still falling, but in recent years it has stabilised also. The table does not show is the makeup of the flocks in terms of breed and sheep category, and these details have an important effect on the expected production of wool, lamb and mutton.

In Australia the proportion of crossbred sheep and wool in the clip has increased since 1990, when the dominance of the merino reached an all-time peak. Figure 1 shows the volume of merino sales (in clean mkg) for the past forty years. Whereas the Australian flock is down by around 58% since 1990, the merino production is down by around 66%, reflecting the falling proportion of merino sheep in the flock. By contrast cotton consumption (a more steady measure as production jumps around) has increased by 25% since 1990.

Falling supply has helped to underpin the high wool prices we are seeing now, or probably more accurately falling wool supplies have helped underpin the increased basis of wool to other major fibres. Figure 2 shows the Australian merino volumes from the early 1990s onwards, as they collapsed under the weight of stocks left over from the Reserve Price Scheme, and the ratio of the average merino micron price to a polyester staple price series. As merino wool volumes trend lower, the basis to polyester (cotton and acrylic) rises.

Chicken proffers an example of a completely different scenario to the wool industry. Figure 3 compares the chicken proportion of per capita animal protein (beef, sheep meats, pork and chicken) consumption in Australia during the past 30 years with the basis (percentage difference) between a chicken price series and the weighted average prices of the other animal proteins. As the chicken proportion of animal protein has risen from 20% to 40% the price of chicken has fallen in relation to the other meats. In actual practice the price of chicken has not changed a lot, with prices for beef and sheep meat rising in relation to the chicken price series. The chicken industry (albeit an intensive one) has used constant productivity improvements to allow then to hold their price, steal market share and grow production.

High prices are good (if you are selling) and producing a niche product can be quite a good enterprise. The purpose of this article is to simply point out that on a decades long perspective significantly lower supply levels corresponds to higher prices for wool. This point needs to be kept in mind during discussion about the industry and be used to test claims made by various marketers about the causes of higher prices. 

What does this mean?

The risk for the wool and sheep industries is to revel in the current high prices and good enterprise returns without thinking hard about how lower volumes are helping to boost prices in relation to substitutes. Production volumes are important to the supply chain for maintaining economies of scale and investment in research and development. The chicken industry offers an alternative scenario where consistent productivity improvements over decades have been converted through lower relative prices into larger market share and larger production volumes. 

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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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