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Wednesday, September 07, 2016

Where the rain goes, the wool follows

By Andrew Woods  |  Source: BOM, AWEX, ICS

Key points

  • With September upon us we can have more confidence in the projected 12 month rainfall rank for the spring.
  • The projected 12 month rainfall rain for the spring is some two to three deciles above year earlier levels which is a big lift.
  • As importantly the increase in rainfall rank appears to have a good chance of persisting for most of this season.
  • A big rise in rainfall rank is a proxy for a big improvement in seasonal conditions which will lead to a change in the micron profile of the Australian wool clip.

2016-09-07 RAINFALL WOOL FIG 1

2016-09-07 RAINFALL WOOL FIG 2

It is an underlying fundamental of agriculture that production relies on rainfall. Change in rainfall leads to change in production. This article looks at the effect of the change in seasonal conditions, using rainfall as a proxy for pasture growth, of the finer and broader micron production in the Australian wool clip.

Mecardo commented that rainfall had been excellent, so far in early August. Seasonal conditions continue to be excellent through August. With the arrival of September we can project the rolling 12 month rainfall rain through the spring, using median rainfall levels for the next 12 months, with some more confidence.

Figure 1 shows the rolling year on year change in the AWTA 20-22 micron volumes (smoothed by 3 months) from 2000 onwards (left hand axis). Overlaid is the year on year change in the rolling 12 month rainfall rank, a weighted average for all production regions (right hand axis). The change in rainfall does a good job in explaining a lot (but certainly not all) of the change in 20-22 micron volumes. Extended periods of change in rainfall tend to drag 20-22 micron production up when wetter and down when drier.  Using median rainfall for the coming 12 months allows a projection of the rolling 12 month rainfall rank to be constructed, with the year on year change in this projection shown below to be strongly positive (plus two to three deciles) for an extended period. This means that the production for 20-22 micron wool is very likely to be increase year on year as this season progresses.

Figure 2 shows a similar analysis to Figure, for the 15 to 17 micron category AWTA volumes. Note that the left hand axis showing the change in wool volumes is reversed, which reflects the increase in fine wool volume sin dry weather and decrease in wet weather. Seasonal conditions were looking promising in mid-2014 but the spring proved to a dry one, so the response in decreased fine wool production was cut short. The projected change in 12 month rainfall rank is on par with 2010 and 2011 when the volume of 15-17 micron wool fell by 30%. Such as seasonal production response is likely to be boosted by grower reaction to the extended period of low fine wool premiums of recent years. 

What does this mean?

The change in merino micron profile which Mecardo analysed at a couple of weeks ago is looking likely to happen. Projected changes in the 12 month rainfall rank look the best since 2010. The wool market has spent most of the past five years with lower year on year volumes of broader merino wool. In the coming year the market will have to deal with increased volumes of these categories, which will allow the micron premiums and discounts to widen from their depressed levels. It may also take some of the underlying strength out of the greasy wool market.

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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