Month: April 2018

Supply in Australia continues to underperform for the broad merino categories, at a time when other greasy wool exporting countries are at a low point in their seasonal supply patterns. This article looks at the latest AWTA core test volume data, which allows a breakup of supply by micron category.

Figure 1 shows the year on year change for March 2018 AWTA core test volumes by micron category, running from 15 micron and less on the left through to greater than 30 micron, then cardings and finally total volume on the right. The 20 through 23 micron categories, effectively the merino production on the broad side of the average fibre diameter of 19 micron, stand out as having the largest fall in March. 21 to 23 micron volumes are down by 35-40%, which is a large fall, complicated by the continued high level of vegetable fault in eastern Australia.

As a check on single month variations in volume, Figure 2 shows the year on year change in volumes for the January to March period. It shows a slightly different view. However the 21 to 23 micron volumes are still down by 20-30% for the March quarter compared to a year ago which is still a large fall in supply. On the three month view, 17 to 19 micron volumes are up, as are the major crossbred micron categories. Overall the total wool volume for the March quarter is down by 2.5% compared to 2017, which does not tell what is going on for the different micron categories.

So, what is happening? In March 2017 some 59% of 21 micron wool sold at auction came from four regions; the Great Southern in Western Australia (24%), the Midlands in Western Australia (9%), northern South Australia (16%) and southern South Australia (10%). While the auction and AWTA data are not directly comparable, the drop in 21 micron volumes in these four regions accounts for some 25% of the 39% drop seen in March AWTA volumes. In other words these four regions account for about two thirds of the change seen in 21 micron volumes.

The four regions accounted for 58% of 21 micron sales in April 2017, before dropping back to around 40-44% by mid-2017. The seasonal conditions in these regions which has caused the current fall will not turn around quickly and given their continued importance to 21 micron supply in Australia, it seems likely the supply of broad merino wool will remain well below year earlier levels for the balance of this season.

Key points:

• AWTA total core test volume fell by13% in March, and is down by a smaller 2.5% for the March quarter.
• Changes in total volume, however, mask some quite varied changes in volume between the different micron categories.
• In terms of micron categories, the broad merino micron categories have fallen significantly this year.
• 17-19 micron volumes are up as are the main crossbred micron category volumes.

What does this mean?

The supply of broad merino micron wool is down by 20-30% for the three months to March and by more in March. Two thirds of this fall is coming from the Great Southern and Midlands in Western Australia and South Australia. These regions are likely to continue driving the supply of broad merino wool well below year earlier levels for the balance of the wool selling season, which should help support broad merino prices which in turn will help support medium merino prices.

There was no post Easter price spike this week, with processors seeming to have their supplies booked up well in advance. Saleyards were well supplied, and the good news, again, is that prices remain relatively strong despite plenty of lambs and sheep being on offer. 

Lamb prices eased marginally this week, and mutton prices were up a bit. The result has the National Mutton Indicator (NMI) sitting close to an 8 month high in relative terms. Figure 1 shows the NMI is now at a 38% discount to the Eastern States Trade Lamb Indicator (ESTLI), which is just below the mark set in December.

The NMI discount might be strong relative to the last 8 months, however strong supplies see it still sitting 8 percentage points below this time last year.

It’s interesting given the low sheep offtake shown in this week’s analysis article  that this year mutton has been more discounted than during the flock liquidation of 2014-15.  Obviously, lamb prices are a lot higher and this appears to be putting some pressure on the mutton discount, despite being in the midst of a flock rebuild.

The Aussie dollar has weakened recently (figure 2), this should be providing support for export lamb values in our biggest markets. The ESTLI in US dollar terms is now looking not that expensive. Figure 3 shows USD prices were higher last year, and in 10/11 and 14/15.

This is another indication that perhaps there is room on the demand side for lamb prices to push higher, that is if supplies do start to wane over the coming month or two.

The week ahead

The lamb market is in reasonable shape. There will be upside if or when it rains, but the trade was shaping between the US and China has added in some uncertainty. There will be no direct impact on Australian lamb, but China’s tariffs on US beef and pork are likely to have some indirect impacts on our meat values.  Which way our prices get pushed requires a bit more analysis.

Last week was a day short of a full one, thanks to Good Friday. The short week saw a predictable drop in both sheep and lamb slaughter, but supplies remained much stronger than Easter last year.  Prices are starting to fall behind last year levels, so this week we thought it timely to take a look at what price and supply tells us about demand.

Figure 1 shows Good Friday dragged weekly east coast slaughter back to its lowest level for the year to date.  Easter 2017 is clearly shown, with the added week of Anzac day seeing three weeks of low slaughter. Last week lamb slaughter was 2.5% higher than Good Friday week last year.

Sheep slaughter was much stronger. This year Good Friday week sheep slaughter was an extraordinary 26% stronger than last year. Combined sheep and lamb slaughter was 7% higher than last year.

The last week took total year to date sheep and lamb slaughter to 4.6% higher than last year.  The extra 250,000 sheep and lambs slaughtered for the year so far equates to around 3 days of sheep supplies. It’s interesting that this is the case, even despite 50,000 head of weekly kill space being taken out by the January fire at Thomas Foods.  NSW and Victorian processors have more than picked up the slack, seemingly driven by good demand and margins.

Figure 3 shows it was this time last year that the Eastern States Trade Lamb Indicator (ESTLI) really took off. Not surprisingly, the rally towards 700¢ coincided with a solid autumn break across the Eastern States, which no doubt tightened supply.

We’ve identified that demand for lamb and sheep has been stronger than last year for much of the 2017/18 season to date. This is evidenced by prices being similar or stronger, despite supply being stronger.

Last year’s strong prices from this point may have been driven by stronger demand, as lamb supply remained relatively steady. Restockers would have contributed to increased demand, but this time last year might have been the start of the current strong demand period.

What does it mean/next week?:

While strong lamb and sheep supply does mean weaker prices now, at least weaker than the peaks and this time last year, it does bode well for those looking to sell lambs and sheep over the coming months.

May is usually one of the stronger slaughter months for the year, but with strong numbers coming through to date, it might be the month for the winter price rally.

Key Points

• Lamb and sheep slaughter was lower for Easter, but still well above last year.
• Prices are falling behind last year’s levels, but demand remains similar.
• Continued strong supplies of lamb and sheep should see tighter supply, and stronger prices over the coming months.

Anecdotal reports of the lack of rain boosting throughput levels along the East coast, particularly in NSW, are being supported by the yarding numbers this week with a spike in both sheep and lamb throughput noted. Despite the higher offering, prices have remained fairly stable with the Eastern States Trade Lamb Indicator (ESTLI) only 3¢ lower at 612¢/kg cwt and National Mutton managing to gain 2.6% to close at 437¢.

Figure 1 highlights the combined sheep and lamb throughput pattern for NSW with the jump in yarding levels on the week quite evident, coming in at 190,195 head – 54% higher than this time last season and 89% above the seasonal five-year average pattern. The high NSW yarding of lamb and sheep is a result of the lack of rain to much of the Western regions of the state.

February rainfall deciles from the Bureau of Meteorology show much of the state suffering from below average to very much below average rainfall conditions. Figure 2 and the animation of daily rainfall levels during March, emphasize the dry start to Autumn.

Elevated NSW throughput numbers for lamb and sheep have underpinned higher East coast figures on the week, with a 41% jump to over 303,000 head – figure 3. Indeed, the combined East coast lamb and sheep yarding is now sitting 54% higher than the average seasonal level for this time of the year according to the data over last five years.

Despite the additional supply at the sale yard, lamb prices across the Eastern states are holding up reasonably well. Restocker lambs are back above 600¢ in Victoria (625¢), NSW (637¢) and South Australia (600¢) with Trade and Heavy Lambs across these three states mostly unchanged on the week. Victorian mutton rebounded over 6% to see it back above 450¢, while SA mutton took a bit of a dive, down 9% to 365¢. In the West Trade Lambs went sideways, closing above 630¢ while WA Mutton bounced over 9% to get back above 410¢.

What does it mean/next week?:

There isn’t much rain on the horizon for most of the nation, although the northern tropics will get some into next week, but it’s unlikely to shake out further sheep and lamb supply as the Easter break will cause some disruption to sale yard flows.

It’s probably fair to say producers with concerns about the recent lack of rain and access to pasture have brought forward their supply, adding to this weeks elevated throughput. The prospect of tighter supply in the weeks following the return post Easter, should lend some support to prices, especially if we start to get some Autumn rain.

The pattern of the wool market rising one week and falling the next continued. This week saw the market continue the weak finish to last week’s sales and post a week of price corrections.

The Eastern Market Indicator (EMI) gave up 6 cents to 1772 cents, while in US$ terms the EMI lost 3 cents to 1364 (Figure 1).

This US$ level for the EMI is the lowest the market has traded for this year, an indication that unlimited demand and price rallies are no more the case now than they were ever. It now appears that the market may have found a top (in technical or charting terms) in January, and with reports of tightening Chinese credit terms we could be lining up for weaker demand and lower prices in 2018.

The AU$ played its part and lost favour during the week, easing again by 0.5 cents to US$0.77, which softened the fall in the general market indicators. The West fared better, due to the later selling last week the market had already pulled back, in fact the Western Market Indicator (WMI) gained 2-cents to 1869 cents.

There was an interesting spectrum to the market this week; the crossbred section posted another week of increases, and due to the greater volume of crossbred wool in the Melbourne catalogue the Southern Indicator held steady.

Crossbred types for the second week in a row rallied between 10 and 20 cents. Merino skirtings performed stronger than the fleece types although generally slightly lower for the week.

Merino Cardings had another good week, posting around a 24-cent improvement across the three cardings indicators.

The past three weeks has seen the Pass-in rate fluctuate with 9%, 4.0% and this week 7.8% passed by growers as they react to the variable market week-on-week. Generally this rate has fluctuated in line with market movements week on week.

There was an increased clearance this week of 41,334 bales, almost 5,000 bales more than last week.

The week ahead

Next week is the Easter break, with sales resuming the week beginning 9^th April.

On resumption, almost 49,000 bales are offered, which will test the resilience of the market. AWEX report that volumes are predicted to decline after this sale.