Category: Wool

Last week we reported “whispers of nervousness” among exporters, well this week they could be called “loud comments”, perhaps not “shouts” at this stage but the mood has swung over the past two selling weeks. The question is should we be concerned or is this a response/reaction to the strong prices that have been evidenced in 2017?

The EMI closed down 44 cents in A$ terms at 1502¢ and also softer in US$ terms at 1151¢, down 33¢. In the West, the indicator was off slightly more with a 46¢ decline in A$. terms. – figure 1.

Growers & brokers reacted by lifting the pass-in rate to 16.4%; W.A. particularly aggressive with a 25.3% rate.

To keep it in perspective though, the 18 MPG in Melbourne had 17 consecutive weeks of gains beginning in January this year. The market improved by 615 cents, before the correction this week where 59 cents was wiped off in Melbourne & Fremantle and 89 cents in Sydney.

Over the same period the 21 MPG lifted 140 cents before giving back 90 cents over the past 2 weeks.

On a slightly different tack, the 18 – 21 MPG Basis (or 18 MPG premiums over 21 MPG) has lifted from 242 cents in January to 740 cents this week; a lift of 498 cents this year. The improving fine wool basis is a clear signal that the fine wool doldrums of the past 7 – 8 years are behind us. Previously the fine wool rallies have been short & sharp, we will need to watch closely over the next 12 months to be alert to any future retracements.

The market correction is a timely reminder that the wool market is volatile and that prices don’t always go up (or down!). The Wool Forward market has been active, and it should be noted that forward prices are always more attractive on a rising market, compared to the same market level on the way down.

We also know that it is difficult to decide to forward sell on a rising market; perhaps it will be even better next week?

With the market at record levels (still!!), it is a good time to look at the forward price relative to your expected shearing and also in relation to your financial budget. Reducing risk and locking in profit generally makes sense, but in this environment, it is even more compelling.

The week ahead

Next week we have just over 49,000 bales listed for sale with trading schedule two days. While it is expected that the full extent of this offering will not all eventuate, this year the most bales sold in a week was the first sale back after the Christmas break where 48,800 bales were cleared.

Reports around the sale this week however, are that this is only a “hick-up” to the market, not a serious concern. Stocks are still reported as “very tight” along all sections of the wool pipeline. We tend to agree that the market is not under great pressure, and with growers prepared to pass-in large volumes the market should find support.

A bit of a mixed market this week with the very fine end still surging forward but some beginning whispers of nervousness among exporters at the auctions this week starting to creep in, although this may begin to be eased by a softening A$.

The EMI closed flat on the week in A$ terms at 1546¢ and slightly softer in US$ terms at 1184¢, down 4¢. In the West the indicator was off slightly more at around a 20¢ decline in both A$ and US terms – figure 1. Reports from wool brokers this week suggest that for the first time in a few months’ exporters have begun to question how long the rally can be sustained.

Given the higher volumes on offer, the reaction of the market as a whole not too bad with the 20-22 micron categories taking the most heat. A total of 45,507 bales sold out of 49,214 on offer resulting in a slightly higher pass in rate of 7.5%

Taking a look at where the EMI is trading in A$ terms, when compared to US$ terms, relative prices being paid for Aussie wool by offshore buyers is still lower than the 2012 and 2011 peaks, suggesting that there may be some life left yet in the current rally – figure 2. The market potentially taking comfort next week in a further softening of the A$ overnight toward 76.3US¢, particularly if the currency can continue to drift off over the weekend. Most major Aussie banks still forecasting an A$ toward 70¢US by the year end which will provide medium term support to the wool market should they prove to be correct.

The week ahead

Next week we have just under 47,000 bales listed for sale with trading schedule two days. A drop in volumes on offer for week 40 and 41 toward the lower 40,000 region could see further gains in price in the coming week, particularly if the A$ can slide back towards 75¢US.

A review of prices and sentiment 12 months ago, helps explain the euphoria that wool growers are feeling at the moment. Back then fine wool was at all time low premiums to medium wool. Fast forward to now and the AWEX reports note that it’s the fine wool that is driving the market.

This was a big week for prices on top of a stellar run over the past few sales. The EMI lifted 24 cents, but with a stronger Au$ it was 43 cents higher in US$ terms. To pick a MPG category, 18.5 was quoted +80 cents in Melbourne, +95 cents in Sydney and +59 cents in Fremantle over the week.

These moves shifted the fine wool premium to the highest levels since 2011, over this period the low for 18/21 Basis was 30 cents three years ago, it now sits at 708 cents. (Fig 2.)

One way to put perspective on where prices are relative to the past is via Percentile Tables. Since 1996 only 18, 21 & 22 MPG have reached higher levels, that is for 100% of the time since 1996 the market has been lower than the current price for all other Merino micron types. No doubt a fitting reward for those that have stayed the course and are now selling wool at very exciting prices.

Like all markets, high prices don’t last forever. One theory is that “high prices are the antidote for high prices”; that is high prices encourage increased production which then causes prices to fall. Due to the low sheep numbers, and the competition from other farm activities (prime lambs are also very attractive), any increase in wool production will be slow at best.

Coupled with the virtual non-existence of any wool stocks either on farm, in brokers stores or in mills; then the outlook has little supply pressures ahead.

So, is this time different? Usually there is some analysis that says the current rally (note the sharp spike in 18 MPG Fig 1.) will be different from the past and not have a correction. At this stage I don’t think anyone really knows, but caution is the best way forward and fine wool should be sold as available and forward sales for future production progressively made.

The week ahead

The market in Fremantle closed a little softer for 20.5 and coarser wool so some caution for the 2 day sale next week. A increased offering of 51,200 bales is rostered for next week, over 10,000 up on this week’s clearance of 39,800. In subsequent weeks though, AWEX is forecasting back to 42,000 bales per week.

“Unrelenting” was the term used to describe the market by AWEX at this week’s wool sales, as fine wool continued to lead the upward movement. Recent terms to describe the wool market have been less flattering or positive, so either we are getting caught up in the hubris of finally seeing good prices, or “this time it’s different”?

Again, fine wool was the outstanding performer but the underpinning of the medium wool price (21 MPG) is providing support and optimism for the ongoing strong market outlook.

With the 21 MPG now 240 cents higher year on year and touching 1500 cents; the bigger story and the key confidence booster is the fine types. 18 MPG is now almost 700 cents above year ago levels; of interest is that in March 2015 the 18 MPG quote ranged between 1440 and 1470, this year the last 3 weeks has seen it move each week upwards, beginning at 1784 (Melbourne) and this week quoted at 1910.

Cardings again were dearer, with all selling centres reporting the Carding indicator comfortably above 1200 cents. The average price for Merino wool is currently boosted by the prices for the lessor lines, all contributing to the best cash flows seem for wool producers for many a year.

There are many in the industry forecasting this market to at least hold these levels, and perhaps also that the tighter supply in the winter will push to some extreme pricing. There is good support for this rationale, supply is tight at all stages of the supply line, with exporters also reporting that they too are now able to make margins on trades as processors step up to purchase. It is of note that although these are long term record prices for growers, it is still below the peaks of 2010 – 11 when the Au$ was at parity. (Fig 1.) This supports the prospect of the market may still have some steam left in it.

This “hand-to-mouth” situation will support demand, and with woolgrowers “cashed up” any minor retracement in the market will result in reduced offerings as growers step back. The tight supply situation may provide a rare opportunity for producers to influence a market in their favour.

The ongoing strong auction is providing good opportunities in the forward market with Riemann trading across a range of maturities from 18.5 to 21 MPG contracts.

The week ahead

While the EMI rallied a further 22 cents this week, in US$ terms it actually fell 3 cents on account of the Au$ down by over 1 cent.

A reduced offering of 43,700 bales is rostered for next week, down 2,200 on this week. In fact, clearance to the trade this week was also 43,700 bales, so a smaller offering along with the renewed positive sentiment should see the market hold or improve next week.

Wool broker reports of solid demand from Asian and European buyers saw every category of fleece gain ground this week and pushed the EMI to 1500¢, even the coarse fibres enjoyed some of the action with rallies between 20-30¢ experienced in some crossbred categories.

The broad-based demand evident in the higher EMI in both local and US$ terms, gaining 51A¢ and 33US¢, respectively. The EMI not the only indicator to crack $15 this week with the WMI posting a 65A¢ rise, or 44¢ in US$ terms – Figure 1.

Both Wednesday and Thursday saw gains across the board with some of the finer fibres experiencing rallies in excess of 50¢ on a day. Standout performers for the week included 18mpg in Melbourne, up over 100¢ and Sydney 17.5 mpg not far off that with a 94¢ gain.

Some exporter reports of just not having access to enough wool to sell at the moment really fuelling the surge. A total of 40,626 bales offered this week with 39,461 sold on the red-hot demand kept the pass in rate contained to 2.9% – Figure 2.

The gains in the physical market spilling over into the Riemann Wool Forward market this week with a flurry of activity as growers get set on some healthy forward levels.
Figure 3 gives an indication as to the current mid-point forward prices for a selection of microns out until May 2018 for those that want to consider levels to get a hedge in place.

The week ahead

Next week we have just under 48,000 bales listed for sale with trading schedule over three days in Melbourne and two days for Sydney/Fremantle.

AWEX report a “good solid market over three selling days”; again it was the fine wool leading higher while the rest of the market held firm. Crossbreds also finally found some support and reversed their long downward spiral to see the 28 MPG improve by 19 cents.

The EMI was up A$0.03, while in US$ terms it improved 16 cents on the back of the Au$ increasing by almost US$0.01 over the week.

While 47,000 bales were originally listed, only 45,400 bales were eventually offered with 41,500 sold into a market resulting in a 7.6% Passed In rate. The PI rate was skewed somewhat with growers in Fremantle passing 13.5%.
The question around at the moment is can fine wool continue to rally; will we see an increase in the premium (Basis) for fine wool over medium wool as the clip shifts broader as a result of the improved seasonal conditions? What is the nett effect of recent decisions by Merino sheep producers to re-focus on meat production alongside their traditional wool focus? Historically a push to bigger sheep and more lambs meant a broader micron from these sheep; but has the advances in breeding for wool quality evident over the past 20 years negated this usual outcome?

As Mecardo reported, 21 MPG types were up 34% in volume for the 3 month period, continuing the trend of moving wool across the micron spectrum. The bottom line is that increases in the 20 – 22 micron types are at the direct expense of volume in the 17 – 19 micron categories. Even if the Autumn break is poor, cheap grain prices should mean that sheep are maintained in peak condition again maximising performance but also continuing the pressure on the clip to move broader.
While we can speculate that the long-awaited rally for fine wool will be the saviour of the industry and reverse the trend away from Merino sheep, the reality is that the market will need some time to adjust after a long period of relatively cheap fine wool. Countering this though is the fact that the world wool processing industry has as a result of cheaper fine wool prices become accustomed to using the finer types; cheap basis and plenty of volume over the past 4-5 years has encouraged greater demand.
We also know that fine wool rallies can become price spikes; the problem is that price spikes in the past have been short-lived. Figure 2 shows that the spikes in September 1994, June 2001 and March 2011 were followed by severe corrections. Could this time be different?

This week Riemann traded solid volumes, however most of the action was in the 19 MPG tenor, a big change from volume traded over the past 4 – 5 years which has been 21 MPG focused. This is reflecting where buyers now have their concern; so perhaps it would be prudent for wool growers to take a contrarian approach and focus on 21 MPG contracts to protect future production. This is a good time to discuss with either your broker or Mecardo the type and tenor of forward contracts; high prices and potential further upside for fine wool making an interesting case for trading Basis, something the good grain traders regularly exploit to advantage and worth considering for the next wool clip.

The week ahead
Next week Melbourne is selling over three days with Fremantle and Sydney on Wednesday & Thursday. The strong market has again enticed 47,500 bales to be listed for next week, however forward projections for the following weeks trail off to 40,000 and 43,000.

The good news for the wool market continued; again, it was the fine wool that was the stand-out and led the market. Sydney had a designated fine wool sale; this came at the perfect time for NSW fine wool growers resulting in the Merino fleece and skirtings component having an almost total clearance with only 1.6% Passed In, compared to the national PI rate of 6.7%. The EMI was up A$0.15, while in US$ terms it was 9 cents better.
The premium for fine wool continues to grow, in Melbourne 18 MPG is 500 cents over the 21 MPG, while the Sydney catalogue reported a 550-cent premium due to a generally sounder offering.

The last time 18MPG basis was at this level was July 2011 (Fig 2). Of further note is that in July 2016 (last year) it was quoted in Melbourne at 52 cents. Is that a 900% increase in less than 12 months?
Of the 44,400 bales offered, 41,500 were sold into a market where all but the coarse X Bred types improved on last week’s price levels.
were also good traded levels on Riemann concentrating on the 19 MPG contract with 1700 cents for the winter maturity and 1640 out to September. As one grower noted, “Sales above $2,000 per bale are now available out to December and we have sold plenty below this level in the past 5 years, so hedging a percentage of the next clip makes sense even if we think the market outlook is bullish!”.
This week Mecardo had a look at wool volumes, with the “Some up, some down” article reporting Auction data for merino combing wool showing a continued swing to the broader half of the merino distribution with 21 micron auction volumes up by 34% for the past three months.
Understanding what this observation means to the future for wool was helped when the subsequent article was published looking at how the main competitors to wool were placed regarding price.
The average merino micron price in US dollar terms continues to outperform the major apparel fibres. However, price forecasts for cotton and manmade fibres in 2017 point to their rolling five year ranks easing. It is easy enough to envisage finer micron merino prices continuing to outperform due to lower supply but broader merino categories will have increased supplies coming onto the market which will make continued outperformance difficult.

The week ahead
The combination of a stronger market both in US$ and A$ terms alongside lower Pass-In rates points to a growing demand from processors. This is also fuelled by the expectation of tighter supply for fine wool going forward; all this leads to a strong level of confidence for the near term.
Next week Melbourne is selling over three days with Fremantle and Sydney on Wednesday & Thursday. The strong market has enticed some additional volume to the market with 47,500 bales listed for next week, however forward projections for the following weeks trail off to 43,000 and 40,000.