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Thursday, April 30, 2015

How are wool sales tracking alongside production?

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

Key points

  • Wool sale volumes in recent months well above year earlier levels, while AWTA volumes are little changed.
  • Suggests growers selling some wool that has been held as stock, especially fine merino wool.
  • History shows that auction volumes as a proportion of AWTA (the proxy for supply) volumes varies quite a deal.
  • There is no official estimate or recording of grower held wool stocks.

2015-04-30 Wool Volumes FIG 1

2015-04-30 Wool Volumes FIG 2

Wool volumes at auction in recent months have exceeded expectations, especially for fine merino wool. This article takes a quick look at the relationship between auction and AWTA (production) volumes.

Figure 1 shows a rolling year-on-year change (smoothed by 3 months) for auction volumes (merino and crossbred wool) and AWTA core test volumes for the past decade. By rights, the two series are not directly comparable as there is a timing difference of at least some weeks between wool being tested and sold, but for this article we will overlook this small difference.

You will notice that auction volumes in recent months have lifted strongly while AWTA volumes are relatively unchanged, year on year. This would suggest that farmers are selling more wool than they have produced, therefore are selling down stocks of wool on hold.

AWEX used to report grower wool on hold volumes, with some difficulty in getting all brokers to contribute data. However, about a decade ago AWEX ceased this report, so reports of broker wool on hold now rely on word of mouth - which is either an unreliable source or a confidential one. There is a view in the industry that the less information supplied to the buy side the better. This view, of course, favours those in the middle with access to information doing the trading.

So, without access to grower stock information can we calculate the level of grower stocks? Figure 1 shows that auction volumes vary far more than AWTA volumes. There do tend to be periods when sales are below production, followed by periods of sales above production but the numbers do not really tally. Figure 2 goes part of the way to explaining why.

Figure 2 shows, season by season, auction sales volumes as a proportion of AWTA volumes. The proportion varies between 70% and 93%. The old Australian Wool Corporation (AWC) rule of thumb was that some 15% of the Australian wool clip is sold privately.

Earlier analysis by this writer shows that as fibre diameter increased, the proportion of wool sold privately (outside of auction) tended to increase. So the old AWC rule did not apply evenly across the spectrum of wool types. During the past decade, the proportion of wool sold at auction has varied. As such, it is possible that year-on-year changes in auction volume are caused by changes in the proportion sold privately as well as the general change in supply.

What does this mean?

The increase in auction volumes in recent months, especially of fine merino wool, appears to be the liquidation of some grower-held greasy stock. This would make sense, as capitulation in markets usually comes just as the cycle is starting to change (in this case in favour of fine merino wool). Verifying if the increase in volumes is due to sales of stock requires talking to individual brokers as there is no official report on stocks, and the relationship between auction volumes and wool production is a sloppy one.

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