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Beyond the Bale : September 2018
MARKET INTELLIGENCE REPORT RECORD PRICES The 2017/18 season completed on 30 June 2018, with the EMI (Eastern Market Indicator) price level record broken 28 times throughout the selling season. The AUD (Australian Dollar) EMI closed at 2056ac which appreciated by 532ac for the 12 months from a season opening level of 1524ac, which represents a 34.91% gain. The USD (United States Dollar) EMI closed at 1512usc which appreciated by 354usc for the 12 months from a season opening level of 1158usc, which is a 30.57% gain. At the time of writing, the 2018/19 season has been four weeks into selling and already a new record high EMI of 2116ac was achieved on 16 August. The USD EMI on the same day hit 1539usc which was just 1usc short of equalling the record USD price of 1540usc set in the first week of June. It is interesting to note in that same week in June, the AUD EMI was then over a full dollar lower at 2011ac, giving rise to the benefits of the lower AUD rate against the USD. This 2 month period of forex (foreign exchange) movement put more than 1 AUD per kg more income into local sellers accounts, whilst in reality, the overseas users buying in USD were not being hurt as they paid a similar price in US dollars. Continuation of this currency trend advantage gives rise to hopes of the AUD price being sustainable. Worthy of a mention too was that on the same record EMI day of 16 August 2018, the 19 micron indicator of 2462ac finally surpassed the previous high of 2426ac which was set in numerous auction weeks from March to May of 1988. The superfine categories of 18.5 micron and finer have been higher during the late 1980s and 1990s than they are now, but neither the AWC or AWEX reported those categories until July 2002, so there is no industry reported figures to verify that. Obviously the production volumes of those superfine wools back in those years was significantly lower. Since 2002 though, all superfine categories of 16.5 micron to 18.5 micron are now also at their highest ever levels on industry databases. What is perhaps counter intuitive to the positive tendency argument, is the decoupling of the CNY (Chinese Yuan) against the USD over the past four months. China mostly uses USD to buy Australian wool, but first needs to buy USD using their CNY. The forex rate of USD v CNY has shifted from a rate of 6.27 CNY needed to buy one USD to recently topping at 6.94. That makes every USD 10.7% more expensive to purchase using CNY. Almost exclusively, the Chinese are unable/ unwilling to obtain forex cover against the USD as the CNY is not a true floated currency. It is more often described as a managed floated currency but in the past, hedging could be undertaken with some degree of confidence as the CNY was roughly pegged against the USD, but obviously that scenario has altered significantly since the tariff negotiations between those two countries commenced. According to the Bureau of Labour Statistics CPI (Consumer Price Index), the Aussie dollar has experienced an average inflation rate of 2.54% per year. Prices in 2017/18 are considered 106.9% higher than prices in 1987/88 season. In other words, A$1 in 1987/1988 is equivalent to A$2.07 in 2017/18 over 30 years. So, in the 1987/1988 season when the previous “boom” was in play, the price topped out at an indicator of 1257ac which was in the week ending 22 April 1988. On todays’ dollar for dollar values, that would mean an EMI today would have a theoretical 2018 value of 2601ac. It is essential to note that the “real dollar” or “indicator” quoted figures are neither precise, directly relatable nor comparatively accurate over time and this is just an informal observance of a market price figure. What is clear though, is that whatever is driving the wool price, there is absolute potential for further growth in woolgrower returns. The continuance of efforts to maintain and improve that price is vital and fundamental to the core needs of woolgrowers. STEADY SUPPLY, BUT ABOUT TO DIP 1,780,590 bales of Australian-grown wool was sold at auction during the 2017/18 season. It is estimated a further 195,000 bales was put through private and direct export buying systems, taking the annual figure to around 1,975,600 bales sold for the season. This volume ties in closely with the AWTA Key Test Data which showed that AWTA tested 2,027,178 bales or 360.4 million kgs greasy for the 2017/18 season. This is a year to year increase of 0.7% or 21,000 bales or 2.5 million kg greasy – and indicative that the vast majority of woolgrowers were on a shear and sell strategy. The first 4 weeks of selling into the new season has seen a 14% reduction in wool being sold to the trade. The four week forecast for the last two weeks of August and first two weeks of September sales is indicating a 17% reduction in offered quantities expected. Drought is the major issue, but also figures are somewhat unpredictable at present due to the 6 and 8 month interval shearing playing havoc with estimates. There is some anomaly appearing though as the AWTA Key Test Data for the first month of July of the new season showed just a 3.5% reduction is wool tested. The August Key Test Data will tell a clearer story. We estimate on at least an 8% reduction in the clip this season on tested wool through AWTA which will take the national total to around 330 million kgs. The Australian Wool Production Forecasting Committee has indicated a shorn wool production figure of 322 million kg, down 5.7% from their reported figure of 2017/18 of 341 million kg. NSW produced 36% of the national wool cut and that state is now 100% drought declared, so a large effect on national supply will be felt. Anecdotal evidence and recent surveys suggest a 25% de-stocking has been undertaken, and retention of new spring lambs is yet to be determined. The marginal grazing areas of SA are also badly affected, but almost all other areas are reporting good conditions and hopefully stock are able to be off loaded into these zones to offset the damage done to sheep numbers in NSW and SA. RISING DEMAND With steady supply during the past few years, it is clear that price rises have been demand- driven and not supply-driven. The steady rise in demand from new product areas of consumer markets such as athleisure, sportswear and adventure – combined with the existing traditional suiting and knitwear garments – gives strong impetus to the theory that current prices can last for some time to come. The market right now is very different to the conditions that were prevalent in 2011 when wool markets spiked in price, rather than the steady build-up of recent years. Much of the lift of the past seven years is rightly attributed to the rising middle class of China and their increasing disposable income. According to demographic studies by leading analysts, well over half of China's urban population will be considered middle class by 2022. Educating and inspiring this growing Chinese middle class to understand why Australian wool is versatile and fashionable and worth paying a premium for is vital. The prediction of continued strengthening of the Chinese and other global economies sees demand for luxury goods on a high. It is crucial for wool, and in particular Merino, to maintain the positioning strategy of sitting the product at the very top sector of the fashion triangle. Supply will most certainly come into play this season, but the sustained efforts to educate and attract at the consumer level is vital and a prerequisite for getting that discretionary spend focussed on wool at premium prices. MARKET INTELLIGENCE 71
In the Shops - September 2018