Mecardo Analysis - Ultrafine volumes

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By Andrew Woods | Source: AWEX, AWTA, Loro Piana, ICS

Key points

· While the GFC in 2008-2009 played a role in pushing ultrafine prices lower (as it did for most commodities) increased supply in the following years has held prices at lower levels.

· Supply is still trending higher for ultrafine wool.

· 12 micron wool is primarily sold privately in Australia, so price information is very limited for this micron category.

In markets, the flip side to price is supply, best exemplified in recent years by the low levels of Merino production in Australia – in particular, broader micron wool – and the high price levels. This article is the flip side to the article earlier in the week on ultrafine prices.

Ultrafine greasy auction wool prices fell around the time of the GFC in 2008-2009, and have never recovered their former glory. After this fall in price, a lot of the shedded sheep operations gradually closed in response to the lower prices being paid. Figure 1 shows the median auction 13 micron price and the AWTA core test volumes for 13 micron from 2007 onwards, with a calculated guess of production prior to 2007 made from auction volumes.

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There is a high negative correlation between the rise in supply and the fall in price with the increase in volume explaining about half of the fall in price. The auction sale volumes for 13 micron was below 10 tonnes (greasy) per year prior to 2007. Until around 2014, the supply was 10-15 tonnes per season. Since then it has risen to around 50 tonnes per season. Supply has increased strongly and price has been pushed lower in absolute terms and in relative terms to broader Merino wool.

What about 12 micron? The picture for 12 micron is similar but also less clear. Figure 2 shows a similar treatment for 12 micron and shown in Figure 1. The AWTA core test volume data shows 12 micron volumes to have risen markedly since 2016, from around 3 tonnes greasy per year to 18 tonnes last season. The auction price for 12 micron shows prices to be falling from their stratospheric levels in the middle of last decade. That trend is likely to be correct but the actual detail is not clear as very little 12 micron wool produced is sold at auction.

Figure 3 shows the proportion of 12 and 13 micron wool volumes tested by the AWTA recorded as sold at auction by season from 2006-2007 onwards. The proportion of 13 micron varies from 30% up to 70-80%. Grower stock holding can easily impact on the proportion of wool sold in a season. However, it seems there is a sizeable proportion of 13 micron wool sold outside of the auction system. For 12 micron only a small proportion is sold at auction and recent years this has fallen to range from 0% to 5%. This means that publicly available price data for 12 micron is minimal.

For a look at where the very top end of wool production goes the Loro Piana ‘Gift of Kings' apparel range is a good start (view here). The ‘Gift of Kings' range uses 12 micron wool, for which Loro Piana buy three tonnes of wool from farmers in Australia and New Zealand each season. The apparel looks superb but is out of the price range for this writer.

What does this mean?

The high prices for ultrafine wool in the 1990s and 2000s have seen supply increase, with the rate of increase lifting markedly in recent years. There is a lag between price signals and production changes for wool, so at some stage, it is likely the lower price premiums of recent years will show up in production levels. As most of this wool is now paddock grown, dry seasonal conditions will be paying a role as well. For the time being the increased production is likely to put downward pressure on ultrafine prices/premiums.

www.mecardo.com.au

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