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Thursday, September 24, 2015

Low VM supply means reduced price discounts

By Andrew Woods  |  Source: AWEX

Key points

  • The seasonal pattern in VM discounts moves from minimal levels during the summer to maximum levels during the winter.
  • The discount pattern matches the supply pattern of vegetable fault, although the price discount tends to lag supply slightly.
  • The biggest variation in VM level is in the FNF (1% and less) category, which is the pool of low VM wool used to blend the higher VM levels down to average levels required to meet consignment specifications.

Figure 1. Median 5% Vegtable Fault Discount (19.5 Micron)

Figure 2. Median 5% Vegtable Fault Discount (19.5 Micron ) And Supply

Figure 3. Median 5% Vegtable Fault Discount (19.5 Micron ) And FNF Supply

Discounts for vegetable fault have been low this year, one benefit of dry seasons. This article takes a look at the seasonal pattern of supply of high vegetable fault (VM) wool, applicable discounts and the current situation in the market.

The supply of VM in the Australian clip tends to peak in the middle of the calendar year and reach a minimum level around the Christmas recess. Discounts for VM follow a similar pattern, tending to reach their maximums at the time of peak supply and minimums at the time of low supply.

Figure 1 shows 20 year median monthly discounts for 19.5 micron fleece with 5% VM (compared to the standard 1% VM level). The error bars show the standard deviation in the discount, giving an idea of the acceptable range of discount that can be expected. Finally the current discount for August is shown. The current discount is small by historical standards. This VM discount ranges from around 5% mid-season to 8-10% mid-year.

In Figure 2 the same median discounts are shown along with the supply of 5% and greater VM wool. The supply is expressed in the same format (median monthly levels for the past 20 years). It ranges from around 12% of the clip from April through to August, shrinking to around 7-8% around the Christmas recess. The current proportion of 5% plus VM (around 10% of the clip) for August is shown. It is well below the median level of 12% for August, which fits with the lower than normal discounts seen in recent months.

For exporters the base VM category for blending is the largest category, 1% and less vegetable fault (FNF). As with the wool market generally the supply chain is focussed on the main categories by volume (because that is where production is) with the lesser categories blended into the main categories. Figure 3 shows the 5% VM discounts and the proportion of the clip sold in the FNF category. The proportion of FNF wool in the clip ranges from less than 40% to 60%. In August some 52% of the wool sold was FNF, compared to 41% normally. This meant that it was much easier for exporters to blend higher VM wool to meet consignment specifications around the 1% average level.

Simple correlation analysis between the level of VM and the discounts is not high. While this could partly be due to the discounts calculated, there is a timing effect involved. When the supply pattern is moved in advance of the discount by 1-2 months (supply preceding the price discount) the correlations improve markedly. Thus the market response to changes in supply of increased VM wool lags behind the change in supply.

What does this mean?

While VM discounts have a seasonal price pattern which matches the supply pattern of vegetable fault, discounts can vary quite widely year to year. Currently the supply of high VM is low and discounts are minimal. They should remain at low levels through to early 2016, when the normal seasonal patterns will see them begin to widen.

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