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Tuesday, September 24, 2013

Unskirted merino fleece discounts – fair value or not?

By Andrew Woods  |  Source: AWEX, Gordon Litchfield Wool, ICS

Key points

  • Unskirted merino fleeces have been available to the supply chain for the past two decades.
  • Parts of the supply chain see unskirted fleeces as the end of clip preparation standards. This is not the reality.
  • Unskirted fleeces are lumped in with lots deemed as non-conforming (ie they have preparation problems) by AWEX.
  • The average discount for unskirted merino fleece during the past year has been around 2%.

The elimination of skirting in shearing sheds turns wool rooms from wool storms into models of efficiency. On the other hand, however, it inspires fears of the end of preparation standards in some (persuasive) exporters and early stage processors. In this article we take a look at how the market prices unskirted fleece wool.

In the early 1990s, Fibre Direct promoted the supply of unskirted fleece wool direct to topmakers. The program had a few components including selling direct to processors, based on estimated test results and the elimination of skirting. The downturn in the wool market in the mid-1990s caused some grave contractual problems and Fibre Direct eventually moved under the wing of Landmark, where it still resides. A number of exporters provide forward prices for unskirted wool, with Western Wool also offering fixed price discounts for unskirted fleece wool.

As things stand, wool that is unskirted is deemed to be non-conforming to the AWEX Code of Practice.  As such, it receives a “D” certificate rather than the standard “P” certificate and is tagged as having fribs in its AWEX ID. The “D” certificate means that this wool is lumped in with all other non-conforming wool, even though it may be thoroughly prepared in all other aspects apart from skirting.

Figure 1 shows the weekly average discount for merino fleece that had a “D” certificate and U1/U2 (fribs) flagged in its AWEX ID. The median discount for the past 12 months is 2.1%, but this varies across the different micron categories and between weeks.

What level of discount is expected? Given a fleece to pieces ratio of five to one, the unskirted fleece should be priced at 97% of the fleece price (in the absence of any major faults) - a 3% discount.  In comparison, the median 2.1% discount for the past year is good value.

Cost savings are the other aspect to this method of preparation, and that does not mean the absence of a registered wool classer. A wool classer becomes even more important in terms of making sure the clip preparation standard is maintained. Savings from lower staff levels will depend on the configuration of the wool shed.  This is shown by Gordon Litchfield at Cooma, who has done some study in this area.

What does this mean?

Unskirted merino fleece is discounted about where it should be in terms of the combined price of fleece and pieces components. This discount varies between weeks and fibre diameter categories, and it is this variability which poses problems. A 2-3% discount is fair, but a possible 10% discount is punitive. Fixing prices or the discount for unksirted wool before delivery is a good idea.

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