By Andrew Woods | Source: AWEX, ICS
As an agricultural commodity wool is subject to vagaries of agricultural production. One of these vagaries is the presence of seasonal patterns in production, which the manufacturing supply chain has to adapt to. Seasonal patterns in quality such as staple strength, mid-break levels and vegetable matter affect the processing ability of wool. This article takes a look at current staple strength premiums and discounts and their likely movement in the next six months.
Mecardo reviewed wool quality a couple of weeks ago in terms of staple strength, mid-break level and vegetable fault. The conclusion was that staple strength levels will fall during the next four to five months while mid-break levels will rise. Exporters as a consequence will adjust their pricing of wool characteristics to reflect this change in supply.
Figure 1 provides the frequency distribution of low staple strength discounts for 19 micron fleece for the past decade. In this case the difference between a staple strength of 22 N/ktx and 37 N/ktx is shown. The current discount for this low staple strength is shown by the diamond shaped marker, which is around 3%. Figure 1 shows that this discount has spent most of its time during the past decade in the 4-5% range, so the current discount is on the low side and is likely to increase as the supply of lower strength wool increases. If the supply rises to high levels in late 2016, then the discount could easily widen to around 8%.
What does this mean in practice? It means that if you have low staple strength wool and are considering holding it back from sale then the market will need to rise by at least 2-3%, perhaps by 5%, to cover the expected increase in discount for this type of wool.
What about staple strength premiums? Figure 2 shows a frequency distribution of the premium for 18 micron fleece wool with a staple strength in the 40-49 N/ktx range compared to the 37 N/ktx during the past decade. Specialty spinner style wool is exempted from this analysis. It shows that the premium for this level of staple strength has spent most of its time around 2%, with the current level around 3%. High staple strength premiums for standard topmaker style wools therefore are around average by the standards of the past decade.
Staple strength premiums for wool broader than 18.5-19 micron tend to be minimal, and have been so for some time. Staple strength plays a very minor role in the pricing of these micron categories.
There is plenty of potential for low staple strength discounts to widen during the next four to five months. The question is by how much? An increase of 2-3% looks very likely (taking them back to the average). Larger increases greater than this will depend on the actual supply of low tensile strength wool in the spring and summer. Holding low tensile strength wool into the spring will require the market lifting by 2-3% (plus holding costs) simply to break even. On the flip side there is less potential for high staple strength premiums to increase, as they are already slightly above average levels.
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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