By Andrew Woods | Source: AWEX, BOM, ICS
The latest AWTA core test data shows the February volumes overall to be unchanged on year earlier levels, which is a welcome reprieve for an industry struggling for supply. Fine wool volumes however were well up on year earlier levels. This article looks at the link between rainfall, fibre diameter and fine wool production.
Figure 1 compares the year on year change in a weighted rainfall rank for the Australian merino production regions, with the year on year change in the median merino fibre diameter, which has had its long term downward trend removed. With the increase in the crossbred wool component of the clip to around 20%, it is necessary to calculate the merino fibre diameter separately in order to get an accurate idea of what is happening. The change in rainfall which is a proxy for seasonal conditions explains about two thirds of the change in the detrended merino fibre diameter.
We can use the historical median rainfall data to project forward by a year. This is done in Figure 1 and you will see that the rainfall rank remains below zero through to October when it rises sharply. This tells us that a median rainfall year will result in the merino fibre diameter remaining relatively unchanged until the spring. The market then has a 50% chance of the fibre diameter starting to increase at the end of 2016. Let’s hope the talk of a La Nina comes to something, as this would supercharge such as change given the dry conditions we are starting from.
Figure 2 compares the same year on year change in the merino fibre diameter as shown in Figure 1 with the year on year change in 15-17 micron volumes, from the mid-1990s onwards. The two series are negatively correlated as an increase in fibre diameter leads to less fine wool, while a decreasing fibre diameter moves the micron distribution to the left and pushes up fine wool production. The market has finished the last cycle of decreased fibre diameter/increase fine wool supply, centred on 2013. The stock of fine wool produced during this cycle is still working its way through the supply chain. A couple of wet years are required in order to push the fibre diameter up and reduce fine wool production.
Another year and we once again wait for an average rainfall year or better to help get the wool supply back into balance. The fortunes of fine wool premiums through the fine wool supply are dependent on rainfall lifting the merino fibre diameter and decreasing fine wool production in late 2016. All going well we will see such a change in the spring. Until then the supply of fine wool will continue to pressure fine wool premiums.
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