By Andrew Woods | Source: AWEX, ICS
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.
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.
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