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Wednesday, March 05, 2014

Where goes the rain so follows micron

By Andrew Woods  |  Source: AWEX, BOM, Cottle, ICS

Key points

  • Rainfall points to the fall in fibre diameter decreasing in coming months.
  • This means the year-on-year increases in fine wool production will slow and gradually switch to a year-on-year fall by mid-2014.
  • Clean fleece weights should follow a similar path.
  • The story is muddied by falling sheep numbers, with the Australian flock set to shrink by 5% this season.

2014-03-04 Where Goes The Rain So Follows Micron FIG 1

2014-03-04 Where Goes The Rain So Follows Micron FIG 2

The beauty of the wool market is that rainfall and fibre diameter are well measured variables, which allow us to develop a view on changes in production such as fibre distribution, staple length and clean fleece weights. The links between these factors are not always consistent but the presence of hard data does allow modelling and reasonable estimates to be made.

Figure 1 shows the monthly median fibre diameter for merino wool sold at auction from mid-1998 to this year.  There is a strong seasonal variation with more fine wool sold in the spring, which pushes the median micron lower. In addition there has obviously been a larger trend at work, with the fibre diameter dropping from around 21 micron in the late 1990s to around 19.5 micron for most of the past decade. A trend is overlaid on the graph to approximate the change in flock structure to a finer clip during the past 16 years.

Things become interesting when we look at the variation in the merino micron after removing the trend. In Figure 2, the year-on-year change in the detrended merino micron is compared to the year-on-year change in rainfall for the preceding 12 months, across all wool regions in Australia. The two series line up well with the change in rainfall accounting for 70% of the year-on-year change in the detrended merino fibre diameter.

This relationship between rainfall and micron gives us a short term forecasting tool as the rainfall data is lagged by 3 to 4 months. This means the change in micron for the March to May period has already been set, with micron levels heading back to year earlier levels after spending the second half of 2013 well below year earlier levels.

This implies that the big year-on-year increases in fine wool production seen in the past year will shrink quite quickly. By mid-2014, we should see fine wool production start to fall slightly, compared to year earlier levels. Coincidentally, clean fleece weights should be following a similar path, with their year-on-year fall shrinking and, by mid-2014, starting to increase. At the same time, sheep numbers are going to be lower. This will pull overall wool supply downwards through 2014. How this micron story plays out in the spring depends on rainfall from now until August.

What does this mean?

The big increases in fine wool production are coming to an end for this particular cycle. This will gradually allow supply and demand to move back to a relative position where price premiums can improve.  That said, keep in mind this will not be a quick process.

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