Category: Wool

The Eastern States Trade Lamb Indicator (ESTLI) continues to hold above the 800¢ level as the Victorian flush shows no sign of getting underway yet. However, a jump in sheep yardings in recent weeks has seen the National Mutton Indicator (NMI) take a bit of a slide.

Victorian weekly lamb yarding numbers are running close to the five-year trend currently, just shy of 30,000 head, Figure 1. Last season a drier winter and spring saw numbers present earlier but this year the season has been relatively good for Victorian producers so there will be the opportunity to hold onto lambs to get the most out of their pasture.

The ESTLI seasonal spring decline has stalled in recent weeks as the east coast weekly lamb yarding numbers hover around the 150,000 head region. It is the surge in Victorian lambs we see during September to November that is usually the catalyst for the ESTLI to reach its seasonal low so the next leg lower in price isn’t likely to come until the Victorian throughput starts to swell.

Turning to markets with elevated throughput, East coast sheep yarding levels have been surging of late to see recent figures extend beyond the upper boundary of the normal seasonal range – Figure 2. Above average yarding levels in NSW a key driver of the high east coast figures with weekly sheep throughput over the last month averaging 36% above the five-year trend in this state.

NSW mutton prices reacting accordingly this week posting a 6.4% drop to close at 542¢/kg cwt and dragging the NMI lower too. The NMI finishing the week 4.8% softer at 536¢/kg cwt. In contrast, the ESTLI managed a slight gain, up 1% to rest at 811¢/kg cwt – Figure 3.

Next week

All eyes on Victorian lamb throughput levels in the next few weeks as that will be the clue to the timing of the next dip lower in the ESTLI. Our projections put the ESTLI trough this spring at around the 730¢/kg level in early November.

For the superstitious among us don’t do anything risky today – its Friday the 13^th after all… and stay clear of black cats, just for good measure.

 

The August drop in greasy wool prices was substantial, with drought conditions increasing the sensitivity of farmers to lower wool prices at a time of high feed costs and high sheepmeat prices. This article takes a look at the average Merino micron price during the past seven decades and ranks the August price drop.

Greasy wool, like other commodities, is subject to big cyclical upturns in price and big cyclical downturns. The late rising cycle, which peaked in 2018, was boosted by falling supply. That factor remains, and looks likely to intensify, but seems to have been overridden by a combination of weaker retail demand and a supply chain upset by a tariff war between the USA and China.

Figure 1 shows a composite indicator which represents the average Merino micron price, from 1947 to last month in Australian cents per clean kg. The average Merino micron (as opposed to the average flock micron which is currently 1.1 microns broader) is also shown in Figure 1. The price is shown in nominal terms but even so the peaks of 1951, 1973 and 1988 stand out along with the 2018 peak.

Using this price series, the top 20 monthly price falls since 1947 have been calculated. These are shown in Table 1. The winner in terms of largest monthly price fall is February 1991 when the auctions recommenced after the failure of the Reserve Price Scheme (a salient reminder to anyone suggesting we should attempt to manipulate supply in order to manipulate price – if it was that easy). The collapse of the RPS and its immediate aftermath, have another three places of the top twenty monthly price falls.

The next major set of price falls come in a year best remembered for its peak – 1951. Five of the top twenty monthly price falls come from 1951 alone, after the market peaked in March 1951. That is a big effort.

The 1973 peak takes out four spots with two in 1973 and two more in 1974.

Following the 2002 price cycle, which was a classic post stockpile liquidation cycle, prices fell by 17% in May 2003. This ranks as tenth on the ladder.

Amongst these price falls August 2019 ranks ninth in proportional terms. In nominal terms, it is the largest fall but for a valid comparison to the earlier periods prices need to be adjusted for inflation.

The history of price falls after major cyclical price peaks suggests we could experience some more months (not necessarily staring away) of significant price falls. It is possible that the low and falling supply will help mitigate further big monthly falls. In 1988, supply was at peak levels while in 1951 supply was rising. In 1973, the greasy wool supply had fallen from recent levels but was still relatively high. The 2002 cycle was different as supply had fallen significantly in the previous decade.

Key points:

• The August fall in Merino price ranks ninth in proportional monthly price falls during the past 70 years.
• Following previous major price peaks, where supply was rising or was already high, there were a number of large month falls in the subsequent 1-2 years.
• Supply is different in this cycle as it is low and falling, which may help reduce the number of big monthly price falls.

What does this mean?

The August price fall in the greasy wool market was not unusual when previous down cycles from major peaks are considered. Low supply remains an issue in the Australian greasy wool market, and it may show up by limiting the number of big monthly drops in price we experience.

The wool market had a small reprieve from the exhaustive losses that began in June. We did see a similar pause a fortnight ago, although reports from the auction floor suggest that this time around it might be the point of recovery as glimpses of fierce competition were observed on day two.

The Eastern Market Indicator (EMI) fell 32 cents on the first day of sale but recovered 22 cents on Thursday to end the week at 1,365 cents. The Au$ rose to US $0.682 at the weeks close.  As a result, the EMI in US$ terms actually saw a 9 cent gain for the week to finish at 931 US cents (Table 1).

In USD terms the Merino market has basically given up all its gains made since 2015, in the space of 7 months.

It was in Fremantle that AWEX reported a “noticeable change in the room” in the last hour of selling, with strong competition lifting prices. There was an overall loss across all fibres and the Western Market Indicator lost 33 cents on the week to close at 1,383 cents.

Most Merino types saw losses in the range of 10 to 30 cents. Crossbreds and Cardings managed to source some interest. 28 to 30 micron wool recorded gains of 5 to 10 cents, while the Cardings Indicators rose 10 to 30 cents in all three centres.

A significant proportion of sellers withdrew their offering prior to sale. A total of 21,694 bales were offered, of which 11.5% were passed in. Just 19,194 bales were sold for the week. Incredibly, in the seven weeks of this season, 81,731 bales fewer sold than the same period last year and 2018 was already a season of low supply to compare to.

The dollar value for the week was $29.32 million, for a combined value so far this season of $296.49 million.

Prices on the wool forwards market are currently sitting above the spot market, in a rarely seen case of contango. This provides further confidence that the physical market will pick up momentum in the coming weeks.

The week ahead

Was this week a case of a dead cat bounce or have we found the base is the question on everyone’s mind. Positive news in the planned resumption of US-China trade talks may have been the pinch of confidence that buyers needed.

Next week 27,923 bales are rostered on offer across Sydney, Melbourne and Fremantle. The following weeks 33,465 bales and 28,654 bales are expected.

There was no sign of confidence in the wool market this week. Rostered bales were withdrawn left right and centre and much of those that made the sale were passed in. With another week of US-China tariff announcements and severe price declines, uncertainty is at an all-time high. 

The Eastern Market Indicator (EMI) fell 122 cents for the week to 1,375 cents. In the last four weeks the EMI has fallen 22% to reach levels not seen since December 2016. The Au$ dropped to US $0.673 at the weeks close. The EMI in US$ terms fell 90 cents to 925 cents (Table 1). A low not seen in over three years in foreign terms.

Fremantle had some catching up to do after a week of no sales. The Western Market Indicator (WMI) lost 182 cents to finish on 1,416 cents.

Auctions saw no sign of any real buyer interest across all types. Despite the magnitude of the falls we have seen over such a short time frame there has been no sense of a base. The timing of the current fall in prices continues to match up the downturn that occurred in 2011.

Most microns suffered losses in the range of 100 to 170 cents. Crossbred wools were the least affected, holding ground with minor falls of 5 cents for 30-32 micron wool and 10 to 30 cents. The Merino Cardings Indicators dropped 90 to 135 cents in the east and a whopping 200 cents, with room for it to fall further still to the 780 to 800 cent range.

A total of 26,420 bales were offered for sale for the week but  34.8% Passed In at auction. This meant just 17,221 bales cleared to the trade. For the season to date we’ve seen 64,408 fewer bales sold than the same period in 2018-19.

The dollar value for the week was only $26.12 million, for a combined value so far this season of $267 million.

The week ahead

It’s a concern when high pass in rates, limited supply and a softer Australian dollar still can’t draw out any significant buyer interest. Another announcement last week of increasing tariffs by the US on Chinese imports appears to have been the overriding driver. Further US-China trade negotiations are scheduled for September and will no doubt impact the confidence of Chinese processors moving forward.

Across the three selling centres, 29,061 bales are rostered for sale next week. 32,641 bales and 35,215 bales are scheduled for the weeks following.

While the auction market sings a Tom Petty tune, the interest and activity in forwards is flooding in, with nearly 30 trades this week as growers look to lock in.

In 19 Micron wool, eleven trades were deal this week. For September, trades agreed between 1,655¢ and 1,665¢. November and December saw agreements between 1,640¢ and 1,660¢ while for January and February of next year, trades were dealt at 1,610¢.

In 21 Micron wool, 17 trades were dealt this week. For September, trades agreed at 1,620¢ while for October we saw agreements between 1,620¢ and 1,625¢. November and December saw trades dealt at 1,600¢ while for January 2019, trades agreed at 1,570¢.

In 28 Micron wool, 1 trade was dealt, agreeing at 830¢ for September.

If falls in physical prices continue, we’re likely to see more growers locking in prices with Eddie, but just like the show, we’ll have to wait til after the break to see the results.

The severe price dive of last weeks market thankfully eased this week. While Merino categories still experienced declines, producers can take some relief knowing that the “emergency” status seems to have been called off for now.

The Eastern Market Indicator fell 16 cents for the week to 1,497 cents. The Au$ saw nearly no change on the week, sitting at US $0.678 at the weeks close. The EMI in US$ terms fell 11 cents to 1,015 cents (Table 1).

AWEX report that better style wools with good additional measurements attracted strong competition and held their ground. However, lack of demand for lesser style wools dragged the market down. The Crossbred sector provided the only positives, gaining 25 to 40 cents.

26,492 bales were offered at Sydney and Melbourne, with no sales occurring in Fremantle. With the shock factor over, sellers were more accepting of this week’s prices and 16.1% of the offering was passed in. This saw 22,216 bales cleared to the trade. For the season to date we’ve seen 46,628 fewer bales sold than the same period in 2018-19.

The dollar value for the week was $36.99 million, for a combined value so far this season of $241 million.

The week ahead

The mix of market sentiment from brokers hopeful for a bounce to exporters thinking the market can weaken further provides little indication of what we can expect in the coming weeks. Although to look at the market from a technical perspective, prices appear to be at their support levels in foreign buyer terms.

33,046 bales are rostered for sale next week, with sales resuming in Fremantle and a designated superfine sale in Sydney. In the weeks following, 36,025 and 33,766 bales are expected to come to sale.

It seems no coincidence that when the auction market began freefalling, no forwards were traded. This week, interest in forwards has begun to pique again, albeit centralized around the most popular MPGs.

In 19 Micron wool, four trades were deal this week. For September, one trade agreed at 1,680¢. For October, one trade agreed at 1,665¢ while for November one trade agreed at 1,680¢. One trade was dealt for February of next year and agreed at 1,750¢.

In 20 Micron wool, one trade was dealt and agreed at 1,645¢ for October.

In 21 Micron wool, five trades were dealt, four of these in September agreeing between 1,660¢ and 1,680¢. One trade was dealt for November and agreed at 1,650¢.

As with the auction market, sentiment seems mixed, but there does seem to be some confidence in slightly lower prices in the short term, with some hope for a rally heading into 2020.

Dive, crash and plunge are the headlines strapped to this weeks wool market which saw the largest correction in percentage terms in the last eight years. In absolute price terms, it was the largest in the last 16 years. That being said, with the Eastern Market Indicator currently at 1,513 cents, prices are still higher than the previous two peaks.

The EMI lost 112 cents on the opening day and a further 52 cents on Thursday, for a total 163 cent drop. The Western Market Indicator (WMI) didn’t escape the deluge, giving up 162 cents across the two days of selling to close at 1,598 cents. The AUD actually lifted which sheltered some of the loss in US terms to put the EMI at 1,026 US cents.

All microns and categories felt the fall. 19.5 to 21 micron lost around 200 to 210 cents on the week in all selling centres. Merino cardings were the least scathed of all categories, dropping between 10 and 50 cents.

Since the market started to turn from its peak last year, the EMI has dropped 26%. Although the speed of this fall has been significant, we have seen larger corrections before. In 2011 the market fell 33% in just over a year, and before that, the largest correction was from 2003 to the end of 2005 where it fell 47%, but in absolute prices that was just 569 cents.

When looking at the 19.5 and 21 micron in USD terms, this downward cycle has been very similar to the fall in 2011-2012. During that period the market found a base in the second half of August after strong sell-offs.

37,379 bales were offered at Sydney, Melbourne & Fremantle. As could be expected growers weren’t happy with the falling market and passed in a huge 35.8% of the offering. According to AWEX, this was the highest pass in rate since 2003. This meant that just 23,993 bales were cleared to the trade, 5,648 fewer than last week.

The dollar value for the week was just $39.63 million, for a combined value so far this season of $203.85 billion.

No forwards contracts traded this week.

The week ahead

The uncertainty in global trade has well and truly filtered through to uncertainty in the wool game. Market dynamics become less predictable, with normal supply and price behaviour often lost in the process.

However, the speed and scale of this correction have moved the market towards levels that would be considered good value in foreign terms. This should see some support return to the market.

Next week 33,969 bales are rostered for sale in just Sydney and Melbourne. 34,705 and 37,465 bales are currently forecast for the subsequent weeks.

Wool prices are crashing, and while still historically strong, yesterday hitting one and a half and two and a half year lows for the 19 and 21MPG’s respectively. The wether flock was already falling, here we take a look at how lower wool and strong sheepmeat prices might see further declines in wether flocks.

The Australian Bureau of Statistics (ABS) flock numbers report total adult sheep numbers and the number of breeding ewes. By deducting the number of breeding ewes from total sheep we get ‘Sheep other than Ewes’. While this includes Rams, most of them are wethers.

Figure 1 shows the decline in ‘Sheep other than Ewes’, with the new low hit in June 2018 of 8.7 million head. It’s not just a function of the declining flock, with the proportion of adult sheep falling from 22% to 18% over the last five years.

Strong wool prices were threatening to see the wether flock steady or grow when seasonal conditions allowed. But the latest fall in wool prices, combined with strong sheepmeat prices, might see wether numbers continue to decline.

We have a basic gross margin per dry sheep equivalent (DSE) calculation for Merino Ewes and Wethers, and it shows the spread is growing. The assumptions are a 1 DSE wether cutting 5kgs of 19 micron wool. The ewe gross margin is more complicated, 4.5kgs of 19 micron wool, producing 0.7 lambs at 12.6kgs cwt.  The ewe averages 1.5 DSE over a year.

Figure 2 shows that the latest move in the wool market has wiped $20 per head off the gross margin for wethers since the start of the year and this time last year. The Merino Ewe gross margin per DSE is down $10 on this time last year, and very close to that of the start of the year.

Composite ewes are another alternative to Merino Wethers, and Ewes for that matter.  We can run a gross margin per DSE calculation for them too. Production assumptions are 4kgs of 32 micron wool, 1.25 lambs at 15.4kgs cwt (35kg lwt) and a DSE rating of 2.

The latest fall in wool prices and strong lamb prices has composite ewes, back at the top of the table, but only marginally, making $3 more per DSE.

What does this mean?

Despite a lower cost of production, it’s hard to see the wether flock growing with such a divide in the value of outputs. Wether gross margins per DSE are now further behind Merino and Composite Ewes than they have been at any time over the last ten years.

With strong sheepmeat prices unlikely to go away and plenty of uncertainty in wool markets, there might be more wethers headed to the market once they are shorn this year. We can expect a new low for ‘Sheep other than Ewes’ in the coming year, both in absolute numbers and as a proportion of the flock.

Key Points

• The wether and ram flock hit a new low in June 2018, but strong wool prices might have propped the flock up.
• Expect further declines in wether flocks, as returns are at 10 year lows in relative terms.