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Tuesday, August 04, 2015

How has Merino wool supply changed and what to expect?

By Andrew Woods, ICS  |  Source: AWEX, ICS

Key points

  • Growers found 13% more merino wool to sell last season.
  • The increase in volume was fairly uniform for the main merino micron categories.
  • If seasonal conditions improve this spring the merino clip will broaden. At this stage a moderate increase in fibre diameter of 0.2 micron would not change the supply of 18-20 micron merino wool by much.
  • The likelihood for a change in the average fibre diameter will only become apparent as the spring develops.

2015-08-04 FDD FIG 1

2015-08-04 FDD FIG 2

In the 2014-15 season just finished, auction sales of merino wool rose by 13% on 2013-2014. Anecdotally, the extra wool was mainly contributed by a draw down in grower held greasy stocks (anecdotally, because the industry stopped reporting grower greasy stocks held in broker stores a decade ago). AWTA volumes were up only 1.8% for the season, which agrees with the grower stock scenario. This article looks further into the detail of changes in merino supply by micron.

With the increase in the crossbred component of the clip, it is necessary to extract merino volumes separately in order to look at changes in merino supply at the micron level.

Figure 1 shows the fibre diameter distribution of merino wool sold in 2013-14 and 2014-15, along with the change between the two seasons for every half micron ranging from 12 to 27 microns. While the overall increase was 13%, the categories at the very edge of the distribution varied by far more with wool sales on the very fine end lower and sales on the broad edge much increased.

There is a good chance that the fall in sales volumes at the very fine end was a result of farmers holding wool back as stock. The average fibre diameter increased last season by 0.07 micron, a small change. On the broader edge, some extra wool from the pastoral zones and some from grower stock would easily account for the increase. Essentially, growers found an extra 13% of wool to sell in response to the high prices of the second half of the season, with small changes in supply at the edge of the fibre diameter distribution.

So what can we expect in 2015-16?

Figure 2 takes the 2014-15 supply and makes an adjustment for micron, by increasing the expected average fibre diameter by 0.2 micron. An eventuation of this assumption will require reasonable spring rainfall. It is assumed that total volumes are unchanged. The micron distribution for last season and 2015-16 are shown along with the changes that flow from the assumptions about average micron and overall volume.

Changes at the edge of the fibre diameter distribution are “raggedy”, which is a function of limited volumes not always evenly spread out. Why not use a model of the merino production that smooths out these anomalies? Well, the merino micron distribution may look like a normal distribution but it is not. It is actually skewed slightly to the broader side (always is) so the safest course is to take the most recent distribution and use that as the model for projections, even if the edges of the projection are “raggedy”.

In figure 2, the interesting information is shown by the bars that outline the potential change by half micron. As expected, the finer micron categories fall in supply while the broader micron categories rise. However, there is little change for the 18 through 20 micron categories while, for 17 and 21 micron, the change is only in the order of 10%.

What does this mean?

The relative supply of different merino micron categories did not change greatly last season, except at the edges of the micron distribution. Given the assumption that grower stocks have been drawn down and that sheep numbers are reasonably stable, seasonal conditions will be the primary driver of change in the supply of different merino micron categories. At this stage, a moderate increase in the average fibre diameter of the merino clip (which will require reasonable spring rainfall) would lead to only small changes in the volume of 18 to 20 micron wool, and changes in the order of 10% for 17 and 21 micron wool. Change in supply is not setting up to be a big factor for micron premiums and discounts this season, except for those categories near the edge of the distribution.

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