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Tuesday, July 07, 2015

Wool auction volumes surge a surprise

By Andrew Woods, ICS  |  Source: AWEX

Key points

  • Wool volumes sold at auction are up for the season and well above year earlier levels for the past quarter.
  • Nearly all micron categories enjoyed a rise in supply, with the 24-26 micron category the exception.
  • The increase in supply mirrors the rise in the EMI from late 2014.

2015-07-07 Wool Auction Volumes FIG 1

2015-07-07 Wool Auction Volumes FIG 2

2015-07-07 Wool Auction Volumes FIG 3

The supply of wool has lifted in recent months, well beyond that expected from flock surveys and seasonal conditions. This article takes a look at the change in recent auction volumes and then a slightly longer look back at the change in supply in concert with the Eastern Market Indicator (EMI).

Figure 1 shows the year-on-year change in auction volumes, broken up by micron categories, for the last two quarters. Volumes in the June quarter fell in only the 24-26 micron categories, Eighty-eight percent of these categories are crossbred, half of which is crossbred cardings. Apart from the 24-26 micron categories, volumes surged across the micron categories during the June quarter by 24%. The surge slowed in June, with the year-on-year rise falling to 13%.

Figure 2 looks at the full season change in volumes by micron category, using the same micron categories as in figure 1. In order to give some perspective for each micron grouping used, the proportion of wool sold in 2014-2015 for each micron category is overlaid (orange line).

This puts the big rise in 23 micron wool in perspective, as it only accounts for about 3% of sales. The full season data shows that volumes for wool finer than 16 micron fell, 16 micron volumes were stable while the main merino categories (18-20 micron) recorded solid rises in sales volumes.

If underlying supply factors such as seasonal conditions or sheep numbers do not explain the increase in volume, then the price rise becomes the next factor to be considered.

Figure 3 shows the year-on-year change for monthly sales volumes from mid-2013 onwards, along with the EMI. Sales volumes tend to lower from mid-2013 to late 2014. As the EMI rises from late 2014, sales volumes increase with the year-on-year rise in supply peaking in April.

The change in supply and prices from late 2014 is positively correlated, and makes sense. The intriguing issue is where the supply side found the volume to boost supply in response to the rise in the EMI. Now that the market has retraced a couple of dollars from the early June peak, supply should fall back to be on par with year earlier levels, perhaps even lower for a while.

What does this mean?

Wool volumes sold at auction finished the season up by 10.5%, with supply for the June quarter up by 24%. It seems that the rise in the EMI from late 2014 has progressively encouraged farmers to find some stock to sell, thereby lifting volumes year-on-year. The increase in supply peaked in April. With the correction in price since early June, this increase in supply is likely to abate, with supply falling back to parity with year earlier levels.

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