Farm Tender

Mecardo Analysis - Merino micron volumes and 2020 projections

This article is bought to you by Vic Feeds

By Andrew Woods | Source: AWEX, ICS

Merino volumes have been falling since early 2018, with the average Merino micron consistently finer than year-earlier levels since January 2018. Change in individual micron category volumes is not equal. Change in the average Merino micron, when partnered with the standard deviation of fibre diameter, does a good job of describing (modelling) the Merino micron distribution. This article takes a look at this with regards to supply projections.

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The Merino micron distribution can be reasonably well described by using the average Merino micron (not the Australian flock micron which includes crossbred wool) and its standard deviation. These two factors can be used to build a distribution curve as shown in Figure 1. In Figure 1 the actual Merino micron distribution for the current season to early May is shown (from 14 to 25 micron with the small 13 and 26-27 micron volumes left out) along with the modelled distribution based on the actual average Merino micron and standard deviation. The theoretical curve while not perfect is a close fit to the actual.

In Figure 2 the change in micron volumes for the current season to date versus the modelled distribution is shown. The change only takes into account the change in the distribution, not any changes in overall volume due to changed sheep numbers (which are less) or changed average fleece weights (which will be lower). The theoretical change in micron category volumes (due to the changed micron distribution) is less than perfect but again does a reasonable job at describing the actual changes we have seen. The greatest variations between actual and modelled change, tend to be on the edge of the distribution, where volumes are small.

2019-05-16 Wool 1 2019-05-16 Wool 2

By this stage, most readers will be hopefully still reading but wondering why the emphasis on models when the actual volumes are so readily available? The reason is that the model can be used to build credible projections of micron volume changes. They will be credible because the method does a reasonable job explaining actual data.

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In Figure 3 a projection of change in Merino micron volumes for next season is given. For all projections, the underlying assumptions are the critical input and need to be scrutinised. In Figure 3 it is assumed that the average Merino micron for the full season increases by a modest 0.2 micron. This is a modest recovery given the fibre diameter will finish this season down between 0.4 and 0.5 micron which is a big drop for the Australian Merino clip. The assumed increase in fibre diameter means the average fleece weight should also increase, and this is assumed to offset the projected fall in flock size. This all depends on future rainfall so there are plenty of qualifications, but the supply chain will be making plans for the next 3-18 months so there is some call for looking forward.

2019-05-16 Wool 3

Back to Figure 3. If the three key assumptions work out, then the change in volume by micron category for the full 2019-2020 season will look something like shown in the bar chart. 18 micron and finer volumes will fall and 20 micron and broader volumes will rise, in direct contrast to the past 18 months.

Key points
   * The Merino micron distribution can be modelled reasonably well.
   * Merino micron distribution models allow production projections to be made which build in the varied production changes between micron categories.
   * A modest increase in the average Merino micron in 2019-2020 (conditional upon rainfall) would start reversing the production changes seen during the past 18 months.

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What does this mean?
The current greasy wool market is hanging off some extraordinary broad Merino (20-23 micron) prices which have been driven higher and sustained at these high levels by a sustained fall in production during the past 18 months. A modest increase in the Merino fibred diameter in the new season would see broad Merino volumes increase (off a low base) which would allow broad Merino prices to ease. This will have ramifications for prices across the whole Merino combing and crossbred markets.