Last week Mecardo looked at the relationship between rainfall/pasture growth rate and the average merino fibre diameter. In this article, we go to the next step and look at the relationship between the change in micron, micron category supply, and micron premiums and discounts.
Figure 1 recaps the second graphic shown last week (view here). In Figure 1 the merino fibre diameter distribution for eastern AWTA volumes for April 23 is shown (actually it is the calculated distribution for 15 to 23 micron) as well as a projected distribution for April 2024 assuming a drop in the average fibre diameter of 0.56 micron. The grey bars show the percentage change between April 2023 and April 2024 by micron category, given these assumptions. The April 2023 average fibre diameter was 18.7 micron, so the assumption is the fibre diameter in April 2024 is close to 18.1 micron. Volumes for micron categories finer than 18 micron increase and those broader than 18 micron decrease, with this change increasing as the distance from 18 micron increases.
The change in micron category volumes influences the relative prices of the different micron categories. Figure 2 looks at this relationship. It compares the ratio between the average auction price for 16-18 micron wool to 20-22 micron wool (left hand axis) and the change in the ratio of the rolling 12 month sum of 16-18 micron to 20-22 micron wool sold at auction. In practical terms, we are using this data to look at the relationship of 17 (16 to 18) to 21 (2022) micron price and volume. The change in volume ratio (fine to broad) does not explain all of the change in the price ratio but there is a clear negative relationship.
Currently, the change in volume ratio is close to zero, keeping in mind it is a change in the rolling 12 month total volumes, so there is minimal supply pressure on the 17 to 21 micron price ratio (a premium). Figure 1 showed what can be expected in April 2024, based on median historical rainfall between now and then. This projected change is on par with the micron change seen in mid-2019, not so surprising given we are coming off a run of wet years in eastern Australia. It does point to some strong downward pressure on the price ratios between the micron categories (fine micron premiums/broad micron discounts) in 2024.
What does it mean?
It is hard enough working out what has gone on in the past let alone what is going to happen in a year. However, the likelihood of a drier spring fining up the merino clip is a very strong one, and that points to a narrowing of the relative prices between micron categories. How this actually plays out also depends on the demand side; where broad merino prices go and what level of demand is there for fine merino wool. At this stage, an increase in fine micron premiums looks to be out of the question. The question is how low will fine merino premiums go and for how long.
Key Points
- Eastern Australian merino supply looks set for a significant shift finer in 2024.
- A significant shift finer means a narrowing of the micron category premiums and discounts or, if you like, a flattening in the micron price curve.
- This process should start to get underway in earnest in early 2024.
Click on figure to expand
Click on figure to expand
Data sources: AWTA, ICS , Mecardo
