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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.

In what was a somewhat stellar performance this week, the wool auctions returned after the ransomware attack on the Talman system, to post a result that underpins the current strong demand for wool. The market was able to absorb a record volume and hold prices relatively steady. This at a time when the world of commerce is impacted by COVID-19 virus spreading across the globe, giving support to the notion that the tight stocks situation will support prices in the medium term.

The Eastern Market Indicator (EMI) compared to 2 weeks ago overall lost 19 cents to close at 1,562 cents. The Australian dollar remained under pressure at 0.662 cents. This pulled the EMI in US terms down 17 cents to 1,034 cents.

In the West, the market had a tougher week, The Western Market Indicator giving up 48 cents on the week to 1,662 cents.

The backlog of wool as a result of last week’s sale cancellation meant a massive 62,166 bales were offered to the trade, with a clearance of 47,421 bales. AWEX report this was the largest weekly offering since 2008, and the largest clearance since April 2018. While on the opening day the market held firm, towards the end of the week the increased volume caused prices to soften (especially for secondary types) and the pass-in rate to lift, averaging 23.7% over the week.

The dollar value for the week was $81.07 million, for a combined value so far this season of $1.492 billion. The average bale value was $1,709.

Crossbred types held steady with small gains; 26-micron wool again showed strength on limited volume gaining 8 cents in the South. The Cardings indicators eased in all centres giving up 15 – 24 cents over the week.

The week ahead

AWEX advises the roster for next week is 46,680 with all centres selling on Wednesday & Thursday.

The market then reverts to its usual volumes of 34,000 & 37,000 bales in subsequent weeks. This indicates that the backlog of wool as a result of the cancellation of sales last week will be cleared by the end of next week.

The market eased as the week progressed, however, this could be a response to the record weekly volume, so a close watch on pre-auction sales activity and Riemann Futures trades will provide the best indication of next weeks price direction.

Mutton prices broke through 700¢ on the east coast this week, an extraordinary price given the only place you find it in Australia is in some meat pies. It’s a funny coincidence that this week the announcement came of the impending ‘meat-free pie’ launch. 

Mutton was originally added to the recipe for the famous Four and Twenty Pie as a cheap substitute for beef, and they’ve never been able to get it out without impacting the taste.  Now it seems all the meat is gone and the taste is the same, but it’s not going to impact demand for mutton and by all reports ‘meat-free meat’ is still expensive to produce.

This week the east coast mutton indicator broke through 700¢ for the first time, finishing Thursday at 717¢/kg cwt. Mutton is above 700¢ in both NSW and Victoria, and as figure 1 shows, now more expensive than trade lambs in WA. The rally has been extraordinary.

The Eastern States Trade Lamb Indicator (ESTLI) also moved higher after some brief respite for buyers late last week. The ESTLI is poised for new highs, but the appetite for higher prices from processors might be waning.

Figure 1 shows east coast lamb slaughter was down 16% on the same week last year for the week ending the 21^st, while mutton was back 25%. There is currently 100,000 head of slaughter space which was being used last year, that is now going unfulfilled. We are probably now at the levels where processors are buying sheep and lambs to keep workers busy, as they will lose more by closing down, than killing at a loss.

The east coast restocker lamb indicator this week sat at 1056¢/kg cwt. There is money to be made if the feed is cheap enough. The trucks will have to start rolling from the west soon, as 45kg lambs there cost the same as a 32kg lamb on the east coast.

Next week

For sheep and lamb prices to fall, either supply has to lift, or demand weakens. It is hard to see supply increasing, with any available lambs being sold into record prices. Demand for finished lambs could weaken if a processor or two-bite the bullet and cut production. However, restockers are going to keep a floor under light lambs, which will continue to support trade lambs and flow through to the heavier end. Restocker demand will drive mutton markets too.

This week the Australian wool market was forced to cancel all wool sales due to a cyber attack on the Talman IT platform. While not the only provider of IT systems to the industry, Talman is the largest supplier of in-house wool IT systems in the world.

According to Talman, 75% of the Australian & New Zealand wool industry uses Talman’s software solutions. These services span auctions, delivery, dumping, and overseas export & processing.

In the case of wool brokers, the Talman system allows the broker to manage their pre-sale, auction, post-sale and shipping requirements.

A demand for ransomware was made, with the databases locked and the attacker encrypting all the files. Talman has assured the wool industry that the data had not been compromised.

There is some industry concern that the building of stock as a result of this week’s sale cancelation could dampen down what was expected to be a stronger wool market this week. Buyers were reporting that the lower Au$ had stimulated buying orders.

Coupled with shipping and finance difficulties as a result of the Covid-19 virus impact in China, processing demand could be impacted.

There is a counter view that the reduced sheep flock and therefore wool supply, and the run-down of stocks in China could mean that buyers move strongly to secure supply in next week’s sale.

This makes for an interesting scenario when sales resume, as the “black swan” events of Covid-19 and the Talman ransomware issues weigh against the positives of a lower Au$, reduced supply, and diminished stocks to determine wool market direction.

The week ahead

AWEX advises that sales will re-commence on Monday, March 3^rd, with a sale that could include two weeks of rostered wool.

With last week’s roster listing 44,000 bales for this week, and a further 35,000 bales for next week, we could see almost 80,000 bales come under the hammer. While this could be seen as a daunting task for the market to absorb, its worth remembering that in the first 2 weeks of 2020 the wool auctions cleared 91,000 bales.