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Wednesday, March 09, 2016

Higher discounts for higher vegetable fault levels

By Andrew Woods  |  Source: AWEX, ICS

Key points

  • Wool market premiums and discounts are sensitive to changes in the supply
  • Discounts for vegetable fault (VM) have increased since Christmas in response to an increase in supply of high VM wool to 5 year median levels.
  • VM levels, which have been low for the past three lows, have returned to 5 year median levels.
  • If VM levels stay near their respective 5 year median levels discounts will remain at wide levels relative to the past year.

2016-03-09 Vm And Wool Fig1

2016-03-09 Vm And Wool Fig2

Since Christmas discounts for vegetable matter (VM) have increased at wool sales, after spending much of 2015 at very small levels. This article takes a look at these discounts and the supply of VM in in the national wool clip.

Figure 1 shows weekly discount for merino fleece with 4% and 5% vegetable matter (VM) levels for the past year, in eastern selling centres. The VM considered is mainly burr, with shive dominant lots excluded as well as lots with hard heads such as Noogoora Burr. Increased VM levels increases the wastage of wool when carding in preparation for combing, and also reduces slightly the hauteur (average length of fibres in the wool top) the wool can produce. As a result discounts are applied by the market. Figure 1 shows that discounts for merino fleece with 4-5% VM spent most of 2015 2% and 4%, which are low levels.

Since the Christmas recess the discount for 4-5% VM levels have widened markedly to trade mainly between 6% and 8%. Figure 2 shows the proportion of wool sold in Australia with a VM level of 5-6% from 2011 onwards, along with a rolling 5 year median proportion, with the past 12 months that correspond to Figure 1 shaded.

Mills around the world make their plans with “normal” levels of production in mind, in terms of quality and quantity. In Figure 2 the five year median level of 5-6% VM in the clip is a proxy for the “normal” level, although the supply chain seems often to use the year earlier production levels as the benchmark for “normal” production. In 2011 and 2012 the actual level of 5-6% VM in the clip was well above the five year median. Since 2012 the level of 5-6% VM has generally been well below expectation.

In December the level of 5-6% VM wool in the clip lifted to be close to its fibre year median and in January exceeded the 5 year median for the first time in four years. The return of vegetable matter supplies to more normal levels seems to have caught the market off guard. Reasonable seasonal conditions in NSW, the main source of high VM wool, have underpinned the increase in supply despite very dry conditions in many of the southern regions. To demonstrate the importance of NSW in the supply of VM in the wool clip, in February NSW supplied 66% of the 5-6% VM wool sold at auction but only 37% of wool overall.

What does this mean?

Vegetable matter (VM) discounts have increased during the past few months, in response to increased VM in the clip. VM levels have spent most of the past 3 years at low level and now have returned to more normal levels, in doing so surprising the market and causing discounts to increase markedly. If VM levels remain near 5 year median levels through to mid-2016, then VM discounts will remain at wide 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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