Tag: Wool

Recent sales volumes and AWTA data have shown strong increases in the supply of broad merino wool in Australia. While the supply was expected to pick up on the back of improved seasonal conditions in 2016, the rise has been faster than anticipated. This article takes a look at where the wool is coming from.

Figure 1 shows the year on year change in auction volumes for merino wool from 15 through to 25 micron, in the January to March period for this year. The stand out change is the big (30-50%) rise in the 21 micron and broader merino categories. Fine wool volumes have also been ahead of year earlier levels but the small increases in the face of massive prices rises indicates there is not a lot of spare supply of fine merino wool in Australia.

The question is where is the extra broad merino wool coming from? As Mecardo showed in an article a couple of weeks ago (Merino means different things) around half of the broad merino production comes out of pastoral regions with the balance coming from cropping regions. Figure 1 shows the year on year change in the supply of 21-27 micron merino wool for the past three months by region, around Australia. One region stands out as contributing extra 21-27 micron wool in the March quarter. This region was the Great Southern from Western Australia. In recent years this region has been the dominant supplier of greasy wool to sale in the January through April period, accounting for 15-18% of sales by volume. This year the fibre diameter of wool coming out of the Great Southern has swung broader, so it has supplied nearly half of the extra 21-27 micron wool sold during the past three months. The Midlands, also from Western Australia, has helped as has northern South Australia and the pastoral regions running northern and east from South Australia.

As a check on this change, Figure 3 shows the year on year change in the volume of 12-18 micron wool sold by each region in the March quarter. The big swing to broader wool in the Great Southern region is matched by a big drop in 12-18 micron volumes. Notice the higher rainfall NSW regions have had increased fine wool sales this year, along with south-west Victoria (which was coming off a drought induced low base). The expected decrease in supply of fine wool from NSW has not eventuated, except for the western Riverina. Good seasonal conditions in 2017 (which has started in the Monaro) will be required to pull the micron broader in the regions, in order to lower the supply of fine merino wool.

Key points:

• Broad merino sales volumes have been some 30-50% higher in the March quarter.
• AWTA volumes correlate with the sales volumes.
• Half of the increase has come from Western Australia.
• Fine merino volumes have been maintained in the higher rainfall regions of NSW.

What does this mean?

The extra volume of broad merino wool (in the order of 30-50%) will continue to put downward pressure on broad merino prices.  Seasonal conditions in Western Australia (where half of the increase has come from) are shaping up in 2017 to support this increased supply. The chance of the 21 MPG breaking the 1500 cents barrier looks to have well and truly slipped away. NSW has maintained its volume of fine wool production in recent months, above expectations. The expected boost to fine wool prices from a drop in supply looks as though it will be weaker than expected.

This week the wool market carried on with the positive upward move identified towards the end of last week. Tuesday had across the board rises of 40 to 80 cents, while a further 30 to 60 cents was posted on Wednesday.

The EMI closed up a whopping 53 cents in A$ terms at 1512¢ while in Fremantle, the strong finish to the last week continued with a A$0.73 rise, the west closing at 1532 – Fig 1.

In US$ terms the EMI ended the week at 1134¢, plus 33¢ while the WMI closed at 1149, up 49 cents.

While the market in general benefited, it was the 21 MPG that was the stand out, with the market in Melbourne actually closing at a higher level than before the correction. This is quite remarkable given the increased supply of medium wool coming forward post the drought conditions of the past couple of years. Fig 2.

As reported on Mecardo, the increase for the first quarter of medium wool production is 30 – 50% higher compared to the same period last year. To see this section of the market rally is very positive for the future.

Wool growers responded over the previous two weeks of falling prices by passing in circa 20% as well as withdrawing wool from sale. This clearly supported the market and as a result buyers received orders to fill and as a result the market found support. This week the response was to sell into a rising market with only 5.7% Passed In.

Growers are in the driving seat (not often this is the case!!), as the shortage of any buffer stocks means sellers can confidently withdraw wool from the market and have little risk that better prices won’t appear later.  When combined with record income from any sheep or lamb sales (Mutton hits record) growers will continue to “play” the market; selling when the market rallies and holding out on any corrections.

The week ahead

The drama of prices in freefall over the previous two weeks was largely ignored this week as the reality of tight supplies across the pipeline overtook any thoughts of an overheated market.

With a general feeling that post Easter the market generally has a lift, it is a somewhat optimistic outlook for the wool market when sales resume.

Next week the market is in recess, while we have reports of around 50,000 bales listed for sale in the week beginning 24^th April over two days (Wednesday and Thursday).

The exciting wool market experienced over the past 6 months has now become a confused beast. Despite reports of a lack of supply across the wool pipeline, from farm woolsheds to processor mills, the market again spent the week in reverse. Interestingly, on Thursday the market shifted gears and rebounded to finish strongly.

The EMI closed down 43 cents in A$ terms at 1449¢ and also softer in US$ terms at 1101¢, down 50¢. In Fremantle, the later selling time and strong finish to the week resulted in an indicator less effected with a 29¢ decline in A$. terms for the week – Fig 1.

It was almost a tale of two sales for this week, on Wednesday the EMI & WMI lost 45 & 48 cents respectively, 18 MPG fell 96 cents and 21 MPG in Melbourne was off 55 cents -Fig 2.

The reversal on Thursday saw the EMI gain 2 cents, however the WMI finished plus 19 cents for the day with reports of a strong finish to the market. Gains were across the Merino combing section, 18 MPG plus 16 and 21 plus 19 cents in Melbourne.

Fremantle was stronger with 18.5 MPG finishing up 22 cents and 21 up by 31 cents.

Fremantle provided good entertainment, on Wednesday 33% of fleece lines offered were passed in, and withdrawals for the Thursday sale were significant.

It seems that the falls on Wednesday encouraged exporters to book business and when they returned on Thursday to a reduced offering we saw the resultant rally. This caused the pass-in rate to fall compared to Wednesday, in Fremantle for example the first day a total of 29% was passed-in, however the next day this rate fell to 11.4%. Also impacting was the withdrawal of 20% in reaction to the price falls of the previous day.

The week ahead

This has been the second week of a dramatic wool market correction, coming at a time of tight stock positions across the wool pipeline. That said, it was noted by one buyer that for the past month wool offerings have been increasing, so perhaps this was a test by processors to check the market.

Wool producers are not in any hurry to sell wool if the market retraces like this week, and conversely, they have been keen to sell wool as the market rallied.

While its risky making statements about the market level in the future, the fundamentals haven’t changed despite the market volatility of the past 2 weeks. Supply is tight and mills need to purchase.

Next week we have a reduced offering of 46,200 bales listed for sale with trading scheduled over two days.

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.