Tag: Analysis

After trending lower for 18 months, wool prices would normally start to look for reasons to stabilise. That appeared to be the case in late 2019, but the occurrence of a pandemic (COVID-19) has added a further leg to the existing cyclical downturn in wool prices. This article takes a look at the latest step down in price.

It is helpful, if somewhat occasionally confusing, to look at wool prices in both Australian and USD dollar terms. Usually, they tell the same story in terms of trends and cycles. In the current market the views vary in terms of value, with the US dollar value (percentile if you like) a lot lower than we see in Australian dollar terms.

With the price falls this week in place, wool prices in US dollar terms are plumbing five year lows. 2015 was the last major down cycle. Figure 1 shows the 17 MPG in Australian and US dollar terms from early 1997 to this week. The US dollar value is very close to its five year lows while the Australian dollar value for the 17 MPG is close to its 35^th percentile for the past five years – still higher than for 35% of the past five years. For the 17 MPG we watch to see if new business comes into the market to hold it at or above US1000 cents. If not the next set of lows, reached in 20008 and the early part of the 2000s, around US 850 cents becomes the target.

Figure 2 repeats the exercise for the eastern 20 MPG. Note how the 20 MPG price in both currencies is remains well above the general price levels prior to 2011. In US dollar terms the 20 MPG is back to 2015 low levels. As with the 17 MPG, if support for the 20 MPG does not appear around US900 cents then the lows reached before 2011 become the next target.

Finally Figure 3 shows a similar analysis for the 28 MPG. In US dollar terms the 28 MPG looks particularly weak, as it has fallen below levels traded at during the past decade, and looks to be headed back down to levels last traded at in mid-2010. That implies further prices falls in the order o 8-10% to get the 28 MPG down to around US400 cents, before support turns up.

The unprecedented (at least in peace time) issue in this market is the lockdown of the supply chain at the retail level which is shrinking (quickly) the demand for greasy wool. We have the situation of a greasy wool market delivering wool for which demand has been slashed for an unknown period of time.

Key points:

• In US dollar terms the market now looks for support for merino prices in US dollar terms around current levels which line up with 2015 lows.
• The 28 MPG looks to have further downside to go, before finding support in US dollar terms.
• The price falls since January can be seen as an extension of the pre-existing down cycle, stimulated by the pandemic.
• It will take time for the next rising price cycle to develop, it will not be a quick process.

What does this mean?

The supply chain needs some wool but not the supply coming onto the market at present. It is unknown for how long this situation will persist. In the interim some parts of the supply chain will require wool so supply needs to be maintained but at lower volumes. While normal volumes are offered for sale, prices will continue to be under downward pressure.

In an environment of limited price data and scant access to sheep/lamb indicators we are used to there is still the ability to see what is going on with throughput volume and slaughter. Producers respond to lower prices with a reduced offering at sale yards and meat works reluctant to increase their appetite as supply chains slow and export markets pause for Covid19.

East coast lamb and sheep yarding levels have eased in recent weeks as the rush to offload stock amidst the Covid19 uncertainty abates and prices continue to drift lower. Weekly lamb yarding dropped nearly 30%, while mutton yarding dipped 15% to see combined throughput finish just under 240,000 head.

Compared to the week prior the lamb and sheep is off 25% to rest 7% above the five-year trend for this time in the season – Figure 1. The Easter break often sees ovine throughput reach a seasonal trough during April so the downward trajectory in sale yard volumes is to be expected.

After a short blip up in east coast lamb and sheep slaughter volumes during mid-March weekly levels returned back to the lower end of the seasonal range with the combined lamb/sheep slaughter figures dropping 9% to finish near 380,000 head – Figure 2.

Lamb exporters have been finding it difficult to find cargo space on passenger flights heading overseas as airline traffic grounds to a halt and the supply chain backlog suggests processors are hesitant to increase slaughter activity.

MLA reported just over 20% of chilled lamb exports made its way overseas as air freight in 2019 (measured on a value basis) so it is not an insignificant amount that needs to be transported. Hopefully, the federal government’s announcement of a $170 million rescue package for delivery of export produce to our key export markets will provide the capacity to get sheep meat exports moving again.

What does it mean/next week?:

The continued uncertainty over export demand and supply chain issues saw OTH indicators replicate the sale yards this week as OTH trade lamb prices softened 3% to close at 788¢/kg cwt. OTH Heavy lamb followed the weakening trend too, shedding 2% to rest at 797¢/kg cwt – Figure 3.

It is hard to see lamb and sheep prices bucking the trend for a downward bias in the week leading up to the Easter break, particularly while the spectre of Covid19 looms over offshore sheepmeat demand and continues to play havoc with the export supply chain.

Lamb supply ramped up last week, and without supply data for this week, it looks like it might have been just as strong. Panic selling hit the market and sent prices back towards early February levels. The good news is that prices remain historically strong.

Lamb yardings for the week ending the 20^th March hit levels usually only seen in December (Figure 1). This week the strong supply continued, and while we don’t have total numbers, looking through the major sale yards it looks like they may have been over 200,000 head again.

Lamb slaughter was also up last week at around 350,000 head. The extra numbers in the yards, combined with similar panic in bookings direct to works saw prices continue their decline this week.

The Eastern States Trade Lamb Indicator (ESTLI) duly tanked this week, as supply overwhelmed demand.  On Wednesday the ESTLI sat at 873¢/kg cwt (Figure 2). By no means disastrous, but down 10% on the highs. Wagga was also lower on Thursday, so the ESTLI is conceivably lower again, but we’ll never know.  More on this later.

South Australian lambs were cheaper than WA trade lambs this week, at 775¢ and 797¢/kg cwt respectively. Mutton is still cheap in WA at 513¢, while Victoria had the most expensive mutton at 705¢/kg cwt.

All prices received this week were still well above the same time last year, which is part of the reason the panic selling has taken hold. With lamb and sheep prices still in the top echelons of historical values, sellers will sell in fear of prices heading further south.

Next week.

There were some forward contracts about this week for April and May in the mid-800¢ range for lambs. This suggests processors are still worried about supply and are keen to lock in a portion of what is left.

Meat and Livestock Australia are changing the way they report prices, with officers no longer attending markets. This means we won’t be seeing the ESTLI or NMI for some time, but we will still have prices to track.

Following last weeks drama, the wool market found support and when all is considered, performed well. The finer microns led the way with buyers keen to purchase in the wake of possible total auction room shutdowns in the future.

Concern was noted in the AWEX report that the Covid-19 impact could eventually close sales altogether. In an attempt to get as much wool into the processor’s pipeline before any potential total closure of sales, in the week that was to be the Easter recess, an additional sale has been scheduled.

Supply ex-farm could also be impacted in future weeks. The offering of circa 5.7 million kgs this week came from approximately 1.3 million sheep. Any disruption to shearing teams as a means of preventing group contact could see this supply interrupted or in a worst case scenario, halt.

The Eastern Market Indicator (EMI) gained 4 cents to close at 1,442 cents. The Australian dollar continued its roller-coaster performance and rallied almost US$0.035 cents to be quoted on Thursday at US$0.592. This didn’t help buyers, with the EMI in US terms up 53 cents to 854 cents.

With fewer fine wools the Western Market Indicator struggled, and by weeks end gave up another 26 cents to close at 1,512 cents. WA brokers passed in 19.8% of the 8,089 bales offered, selling just 6,485 bales.

Of the original roster, 11% was withdrawn prior to sale by growers, resulting in a similar offering to last week of 42,934 bales. The pass-in rate fell to 14.3%. nationally leaving 36,790 bales cleared to the trade.

This week the total sales value was $55.35 million (up almost $9. Million on last week) or $1,505 per bale, exactly the same per bale value as last week.

After holding well in the last couple of weeks, Crossbred types eased marginally. The Cardings indicators were a mixed bag, with 17 & 34 cent falls in Sydney & Fremantle respectively, while Melbourne posted a 20 cent gain.

The week ahead

Again a large roster is listed for next week with 45,810 bales scheduled and all centres selling on Tuesday & Wednesday only.

There seems a level of buyer commitment at these readjusted prices, and with supply concerns going forward, the market should at least hold steady next week.

Early March saw an increase in throughput as sheep producers responded to record prices but in recent weeks levels have softened. No sign of processors looking to increase slaughter volumes though despite some anecdotal reports that supermarkets are keen to restock after a run on red meat. With the A$ collapse and concern over a Covid19 economic growth hit the uncertainty has filtered through to sheep and lamb prices. 

Figure 1 highlights the pattern for combined lamb and sheep throughput across the east coast. After an increase in weekly yarding in the first week of March toward levels that were testing the upper boundary of the normal seasonal range nearer to 285,000 head per week, we have seen it settle back toward more average seasonal levels – Figure 1.

This week I heard of an anecdotal report that a large retailer was seeking an urgent 25% increase in processing of red meat so that supplies could be quickly replenished after a run on product from panic buying preppers. 

However, a look at combined sheep and lamb slaughter across the east coast shows that there has been no appetite from processors to engage too heavily in the current market with prices so firm. The sheep and lamb slaughter volumes extending to levels consistent with the depths of winter, running at 24% under the five-year trend for this time in the season at around 365,000 head per week.

Prices at east coast sale yards for all categories of lamb and sheep reported by MLA’s NLRS service softened this week in response to jitters around the Covid19 spread. Mirroring the broader moves the Eastern States Trade Lamb Indicator (ESTLI) dipped 18¢ to close at 941¢/kg cwt and the National Mutton Indicator (NMI) shaved off 41¢ to finish at 668¢/kg cwt. 

Panic behavior we have seen at the supermarket spread to international currency markets this week with the A$ collapsing to an 18 year low near 55US¢. While this is unfortunate for those importing farm machinery or offshore inputs it provides a competitive boost for Australian sheep meat producers. Figure 3 highlights the ESTLI in both A$ and US$ terms with the sharp fall in the local currency allowing lamb prices in foreign buyer terms coming off 10% just this week.

What does it mean/next week?:

Given the depth of concern over the current global economic situation it’s hard to see sale yard prices rallying too much in the short term. A look at the rainfall forecast for the next week isn’t showing enough to encourage restockers too much further either so its likely we will see price pressure to continue in the next few weeks.

If last week in the midst of global turmoil the wool market caught a cold, this week it had “full-blown influenza”. Despite the Au$ free-falling, the wool market was hit hard with buyers reducing limits continuing the EMI downturn for the sixth consecutive day.

From the outset, the market was significantly cheaper with 100+ cent falls across the board.

The Eastern Market Indicator (EMI) lost 83 cents or 5% for the series to close at 1,438 cents. The Australian dollar collapsed losing almost US$0.09 to be quoted on Thursday at US$0.557. This cushioned the effect on sellers however the EMI in US terms was down 181 cents to 801 cents. This was a massive 18% fall and the lowest the EMI has been in US$ terms for over ten years. A sign that the global impact on trade is now clearly transferred into the wool market.

The Western Market Indicator performed better than the East, giving up 78 cents on the week to close at 1,538 cents. There were positive signs late on Thursday where the W.A. market clawed back some ground. However, W.A. brokers passed in 34.1% of the 8,066 bales offered, selling just 5,317 bales. 

While just on 50,000 bales were rostered nationally, almost 8,000 were withdrawn prior to sale resulting in 41,986 bales offered. Only 30,871 bales were eventually sold resulting in another high pass-in rate of 26.5%.

This week the total sales value was $46.49 million or $1,505 per bale, this is around $200 per bale lower than the seasonal average.

Crossbred types again showed the only positive moves with small gains in the 30 & 32 MPG’s although the finer crossbreds fell in line with the merino section. The Cardings indicators were not spared falling in all centres by 50 to 80 cents. 

The week ahead

Another large roster is listed for next week for with 49,874 bales rostered, with Melbourne again selling over three days and all centres selling on Wednesday & Thursday.

In “normal” conditions the collapsing Au$ would be a stimulant for buyers to purchase at lower US$ levels. These certainly are not “normal” times, with probably the only certainty that it will be much less than the 49,000 bales rostered that is eventually sold next week.

After three months of relatively robust numbers, the latest AWTA volume data reverted to its expected trend, with farm bales tested in February down 11%. This article takes a look at annual AWTA and auction sales data.

While AWTA core test volumes are the best measure of greasy wool production in Australia, they are only part of the supply story as farmers can choose to hold stocks of wool back from sale.

Figure 1 shows the annual volumes of AWTA core test data (in thousands of metric tonnes clean) from the late 1990s to the current season to February, The current season is projected using the current drop in clean volumes of 7.4% which is probably too conservative. There is another 30% of the clip to be tested in the final four months of the season and it is likely these volumes will be lower compared to year-earlier levels, dragging the full season fall in volume below 7.4%.

Note in Figure 1 how the clip volume steadied around 2010 and held through to 2017-18 before drought dragged it lower again. At this stage, an Australian clip stabilising somewhere between this and last seasons volume (186,000 to 200,000 clean metric tonnes – 1.6 to 1.75 million farm bales) would be a good outcome. The supply chain would like an increase in supply but that will take some time with good relative prices and seasonal conditions to achieve.

Figure 2 compares auction sales volumes to AWTA volumes. The two are not strictly directly comparable as there are time lags between wool being tested and sold. Anyone who has spent time trying to finely correlate these two series will have come to realise there are differences between them that cannot be “polished away”. Note in Figure 2 that the proportion of wool sold at auction has ranged between 80% and 88% since 2005. The gap is accounted for by farmer stocks and out of auction sales.

The current season presents a big departure in behaviour, with auction clearances dropping to 70% of AWTA volumes. This implies some 10% of the season to date production is being held as stocks by farmers. Price fell heavily in 2003 and 2011-12 without a big reaction in terms of sale clearances. The concerning thing about this increase in stocks is that farmers have a record of holding the stock as prices fall but later offloading when prices are low. Holding stocks when prices thump down as they did early in the season is reasonable but an exit plan is needed for these stocks.

What about the switch to lamb production? Figure 3 shows the proportion of crossbred sales (a sub-set of the data used in Figure 2) to total AWTA volume, in clean terms from the late 1990s to the current season. Crossbred wool stabilised around 16% of AWTA volumes from 2012 onwards, after climbing steadily from the late 1990s.

What does this mean?

AWTA volumes look set to finish the season between 7% and 10% lower in clean terms, which will mean a total drop of 20% for 2018-19 and 2019-20 combined. Grower stocks have increased this season, with sales clearance down by 10-15% on annual numbers from the past decade. So far COVID-19 has only interfered with supply chains, but it will be having some effect of retails sales starting in China, the consequences of which are yet to be felt in the greasy wool market. This factor suggests an exit plan is needed for the new farmer wool stocks.

Sheep and lamb yardings have dipped to levels more consistent with the mid-winter lull in supply in response to 50-100 mm rainfall across much of western NSW and central Victoria this week. Slaughter levels remain in the doldrums too with the tight supply continuing to provide price support.

Weekly east coast lamb yardings dropped a massive 54% with just over 100,000 head presented at the saleyard for the last week in February (Figure 1). This represents a level 40% under the five-year pattern for this time in the season and more akin to what you would expect to see in the depths of winter when lamb supply is at its tightest.

The dearth of lambs is encouraging the appropriate price response with Meat and Livestock Australia’s NLRS service showing all national and east coast categories of lamb posting price increases this week. The Eastern States Trade Lamb Indicator (ESTLI) gained 3% to finish at 962¢/kg cwt. This bested the previous all-time high achieved in mid-July last year by 11¢.

Weekly sheep yarding levels softened too during the final week of February. They were down 55% from the week prior and trended 44% below the five-year average pattern at just under 43,000 head yarded (Figure 1). Despite the lower sheep numbers, the National Mutton Indicator eased slightly, off 1% to 683¢/kg cwt. On the east coast, mutton prices were softer too this week, but NSW and Victorian saleyards still averaged prices above 700¢ so producers there can’t be too despondent.

Although, despondent is a good descriptor for weekly east coast slaughter levels for both lamb and sheep as the high saleyard prices and tight supply are encouraging low volumes at meatworks. East coast lamb slaughter is trending at the lower end of the normal seasonal range, around 9% under the five-year average pattern (Figure 2).

Weekly east coast sheep slaughter levels continue to probe lower, breaching under 100,000 head at the end of February to sit 26% below the five-year average pattern and a whopping 41% under the sheep slaughter levels seen at this time last season (Figure 3).

Next week

Limited rain is forecast for the coming week across NSW and Victoria, with most regions lucky to get above 10mm. Much of SA and WA are set to miss out entirely. Despite the respite in rainfall, the tight supply should be enough to keep sheep and lamb markets ticking along with prices holding stable to slightly firmer.