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Wednesday, November 02, 2016

How long before the micron broadens?

By Andrew Woods  |  Source: AWEX, BOM

Key points

  • Rainfall to date is pointing towards an increase in the average eastern merino fibre diameter of 0.4 micron (year on year) by mid-2017.
  • Past relationships between change in micron and change in rainfall point to the micron starting to increase from early 2017.
  • This increase in micron along with an assumed increase in volume of 5%, projects significant falls in fine wool and rises in broad merino wool volumes, in time for the new season of 2017-18.

2016-11-2 Wool Fig 1

2016-11-2 Wool Fig 2

With a wet September completed we can look forward, using median historical rainfall, into mid-2017 to see what changes are likely in the merino wool clip. This article picks up from the Mecardo article in August and fine tunes projections for the different micron categories in 2017.

In August Mecardo looked at the merino micron distribution and the possible effect that improved seasonal conditions would have (Merino fibre diameter profile). In that article we theorised what a half micron increase in the merino average fibre diameter would do to the individual micron categories.

Figure 1 shows a series for the year on year change in the average fibre diameter of the east coast merino clip from 2006 onwards, the past decade. The other series shown is the year on year change in the rolling 12 month rainfall rank for this region (all sheep regions bar Western Australia), lagged by 6 months. The two series line up quite well with a strong positive correlation (with a correlation coefficient of 0.6).

The rainfall series is not perfect in describing the change in fibre diameter, but it is dominant, explaining some 60% of the year on year change. The added bonus is that the rainfall data is lagged by six months so it gives us a six month forward view (to March 2017) on changes we can expect in the average merino fibre diameter. Beyond six months forward we add in long term median rainfall data, in order to extend the rainfall projections out another 12 months. These projections give a median or middle view of likely changes in the average merino micron beyond March 2017.

So, what does it tell us? Using 2010-2011 as a guide we can expect the average merino fibre diameter to start increasing by January, and to increase in the order of 0.4 micron by mid-2017. There is some error in the correlation so these projections will not necessarily be perfect but they give a reasonable expectation of what is likely to happen.

Given an expected increase in fibre diameter of 0.4 micron by mid-2017, what does that mean for individuals micron category volumes? Table 1 is an updated version of the table shown in the August article (Merino fibre diameter profile), which assume that volumes by mid-2017 are up by 5% on mid-2016 and the average fibre diameter has broadened by 0.4 micron. Note that we are not talking full season volumes but simply snapshots of the clip in June 2017 versus June 2016.

Table shows a significant reduction in 17 micron and finer wool and a significant increase in 21 micron and broader wool, with little increase in 19 micron volumes. 

What does this mean?

The stage is set for an increase in the average merino fibre diameter in eastern Australia by mid-2017. We should see this starting to take effect in early 2017, with a rise of 0.4 micron likely which will drop the supply of fine wool and increase the supply of broad, both substantially. As this process plays out during the second half of the season expected the micron premiums and discounts to widen.

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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