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Beyond the Bale : September 2019
68 MARKET INTELLIGENCE Up until 12 months ago, the price of wool had been on a relatively steady rise for about six years, culminating in a record EMI of 2116ac in August 2018. Since then there has been a period of volatility with prices falling, then rising, and more recently falling away again. What has caused this volatility? A VOLATILE MARKET EXPLAINED Volatility is a factor across most markets and usually restricted to just supply and demand. The wool industry is somewhat unique though in that it has a third contributing factor and that is the volatility of the wool type produced. This factor impacts on supply volume, given Australia produces more than 700 types and descriptions of wool when the old AWC scheme types are applied. This variable is almost always dependent upon the extremes of the climactic conditions under which wool is produced in Australia. These three variations of volatility all impact on wool manufacturing and therefore price. An overview of some of the fundamental drivers of recent price trends, supply volumes and wool type production follows. PRICE VOLATILITY The severely negative events of the first few weeks of the 2019/20 selling season needs to be looked at in context and relativity. The combination of fickle demand and supply in wool (and most commodity markets) means that, at least in the short term, unanticipated changes in demand or supply can generate large price swings. The price decay was largely anticipated but it is the speed and magnitude of that demise that was, in hindsight perhaps flagged but nevertheless, unpredicted by all. Beginning seven years ago in August 2012, wool entered a strong and sustained uptrend. Commencing at an Eastern Market Indicator (EMI) level of 934ac, the market climbed consistently to a peak of 2116ac seven years later in August 2018. This was on the back of a demand that had built steadily. Traditional wool use in knits and woven wear was joined in the consumer markets by creative and innovative products previously made with other materials. Retailers and the wider public started to recognise and pay for the additional benefits that the properties of wool supplied. In isolation though, the past two years perhaps gave us the biggest clue as to what was to follow. Just 12 months ago, prices peaked, but a large part of Australia was gripped by drought with sheep numbers and wool production dropping sharply. Yet prices also lowered, albeit in a generally orderly and perhaps disguised or subtle manner as the daily prices being offered at auction were considered “still too good to have to think too hard to decide to sell”. The previous six years had featured substantial gains amidst a remarkably stable supply, but when that supply fell 12% in just 10 months the price had deteriorated to the order of 13.6% by the season’s end, totally against trend and totally against standard Supply v Demand scenarios in the purest sense. This alone should have been recognised as a market in demand distress. MARKET INDICATORS DURING PAST TWO YEARS AUD/CLEAN/KG , 20 19 18 17 16 15 14 13 12 11 10 9 400,000 375,000 350,000 325,000 300,000 275,000 250,000 225,000 200,000 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20* Season average EMI in ac/clean kg (AWEX) - LHS axis Annual volume tested in greasy tonnes (AWTA) - RHS axis 2017/18 2018/19 , Superfine Merino Fine Merino Medium Merino Fine crossbred Medium crossbred Broad crossbred , 21 20 19 18 17 16 15 14 13 12 11 10 9 Aug 2017 Oct 2017 Dec 2017 Feb 2018 Apr 2018 Jun 2018 Aug 2018 Oct 2018 Dec 2018 Feb 2019 Apr 2019 Jun 2019 Aug 2019 EMI Merino cardings , 2017/2018 2018/2019 2019/2020* 260,000 280,000 300,000 320,000 340,000 360,000 380,000 100 110 120 130 90 80 70 60 50 40 30 20 10 WOOL PRODUCTION V EMI SUPPLY V DEMAND (inlcuding 2019/20 projections*) EMIinacents/cleankg(AWEX)Volumeingreasytonnes(AWTA) , 20 19 18 17 16 15 14 13 12 11 10 9 400,000 375,000 350,000 325,000 300,000 275,000 250,000 225,000 200,000 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20* Season average EMI in ac/clean kg (AWEX) - LHS axis Annual volume tested in greasy tonnes (AWTA) - RHS axis 2017/18 2018/19 , Superfine Merino Fine Merino Medium Merino Fine crossbred Medium crossbred Broad crossbred , 21 20 19 18 17 16 15 14 13 12 11 10 9 Aug 2017 Oct 2017 Dec 2017 Feb 2018 Apr 2018 Jun 2018 Aug 2018 Oct 2018 Dec 2018 Feb 2019 Apr 2019 Jun 2019 Aug 2019 EMI Merino cardings , 2017/2018 2018/2019 2019/2020* 260,000 280,000 300,000 320,000 340,000 360,000 380,000 100 110 120 130 90 80 70 60 50 40 30 20 10 Throw in the rumblings caused by the Sino- US trade imbalance dispute, Brexit, the ban of wool from the Republic of South Africa to China, Middle East tension and inverted bond yields, and the perfect storm hit consumer confidence globally. These factors caused wool markets to accelerate the already negative price trend signals and prices fell another 14.9% in just four sale weeks.
In the Shops - September 2019