By Andrew Woods | Source: ABARES, AWPFC, BOM, MLA, ICS
In December, the Australian Wool Production Forecasting Committee (AWPFC) estimated the opening flock size for the 2013-14 season at 73.9 million sheep, down 1.1% on year earlier levels. This article looks at what is likely to happen in the next couple of years and the key drivers of the flock size.
Figure 1 shows the Australian flock size from 1980 through to 2013. After trending lower from a peak level in 1990, the flock size has steadied in recent years somewhere around 73-74 million sheep.
Price relativities and seasonal conditions are the key, continual drivers of the flock size, with some special one-off factors having an effect for a limited time.
One-off factors include the flock reduction scheme in the early 1990s, where some 10 million sheep were culled from the flock and the issues surrounding OJD (where official sheep numbers affected by OJD policy are not easy to obtain).
Seasonal conditions are primarily driven by rainfall. The official estimate of the 1.1% fall in numbers looks to have been primarily driven by poor seasonal conditions. Figure 2 shows the official year on year change in the Australian flock and a modelled estimate. The modelled estimate is then extended forward by 2 years. If rainfall had been at 2010-2011 levels last year, the model estimates sheep numbers would have lifted by around 3%. As it is, the model estimates numbers were unchanged in 2013, slightly higher than the official estimate.
Price relativities are the factors that farmers will use to decide where to allocate farm resources. In this model, price relativities of wool to wheat and wool to lamb are used. The twist is that it is how these price relativities change over the medium term (say 5-6 years) that correlates with changes in sheep numbers.
At current price ratios (which favour wool) and with median rainfall, the flock is estimated to lift by around 1.5% to 2% per year for the next couple of years. Rainfall is the biggest uncertainty in the coming year, as continued below average conditions would prevent an increase in sheep numbers. Beyond 2014, it will be the price relativities that ultimately determine the flock size.
Sheep numbers are favoured by the current relativities between wool, wheat and lamb, with poor seasonal conditions holding numbers back. Good rainfall in 2014 could see the flock size pick in the order of 3% in 2015. Beyond that depends not only on rainfall but also how the price relativities between the main extensively grown commodities change.
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