By Andrew Woods | Source: AWEX, BOM, ICS.
Wool production depends on the flock size, flock demographics and the average production per animal. Seasonal conditions profoundly affect the flock size and per animal production. In the absence of detailed pasture data for all sheep regions, rainfall is used in this article as a proxy for pasture in order to look at the biggest quality characteristic of Merino wool, fibre diameter.
Figure 1 shows the year on year change in a rainfall index from 1998 to December, with median historical rainfall used to project out through 2019, along with the year on year change in the average Merino fibre diameter. The Merino clip is split off from the overall Australia clip as it has a fibre diameter of around 1 micron finer than the total clip (which includes around 20% of crossbred wool).
The year on year change in Merino fibre diameter is fairly well explained by the fluctuations in the rainfall data, which is lagged by 5 months, therefore, providing a small forecasting ability. In strict statistical terms, the rainfall index accounts for 60-70% of the change in the Merino fibre diameter.
Figure 1 exhibits a big drop in both rainfall and fibre diameter in 2018. This big swing to the finer micron categories (see the article ‘Wool supply trends continue’) is resulting in markedly different supply dynamics for the fine and broad Merino categories. There is a massive oversupply of sub-17 micron wool and an extraordinary undersupply of broad Merino wool.
The rainfall index projections show that on balance it will be late in 2019 before we can expect the fibre diameter to start rising year on year. This is conditional upon rainfall, so a very wet 2019 would lift the fibre diameter more quickly. Median historical rainfall is used in the projection which means there is a 50% chance of rainfall being lower and the recovery slower.
One positive message from the rainfall data is that the drop in fibre diameter is likely to be at its depth around now. Fibre diameter will start to pick up in Western Australia as those regions started to fall in terms of fibre diameter earlier than the east.
However, while the pressure may start to ease in the autumn, there will be still an oversupply of sub-17 micron wool and an undersupply of broad Merino wool. This will continue to flatten the micron price curve during the second half of this season.
* The drop in Merino micron is clearly explained by the drop in rainfall during 2018.
* The swing to finer wool is probably at its peak level and should start to ease in the autumn.
* Oversupply of fine and undersupply of broad Merino wool will continue to flatten the micron price curve for the balance of this season.
What does this mean?
If you are looking for fine micron premiums to rebound, it is likely to happen sometime after it starts to rain. The extraordinary undersupply of broad Merino wool is set to continue, although easing from the extreme levels of 2018. For the greasy traders in our part of the supply chain, supply will remain very challenging for the balance of this season.