The RWS accreditation scheme is focussed on animal welfare rather than wool quality. As such RWS accreditation is spread across a wide array of wool qualities, which can make establishing premiums being paid a tricky process as some of the base prices themselves are highly variable. It is somewhat easier in South Africa as there is a more narrow range of staple lengths, skewed to short combing to open top to carding lengths. The shorter greasy staple length means that staple strength will tend to be high, so fewer factors need to be considered when establishing base valuations.
Figure 1 shows the weekly Cape Wools RWS premium quote, beginning in October 2021 and running to last week, for 19.5 micron in both US and Australian dollar cents per clean kg. From October 2021 to March 2022 the premium ran at high levels, around US250 cents or 300-400 cents in Australian dollar terms. In April 2022 an outbreak of Foot and Mouth Disease in South Africa caused China to close its borders to South African wool (despite having protocols set up from 2019) which caused great problems for the South African market. At this time the premium dropped to around US100 cents.
Exports of South African wool to Chinese processors recommenced in August, with a backlog of containers and limited shipping capacity, and the premium seemed to pick up slightly. In October, as the economic downturn in the major northern hemisphere economies began to be felt the premium fell again to around US40 cents, which is where it has finished 2022 as South African wool sales have entered their Christmas recess.
The first factor to look at with regards to the drop in premium is supply. Figure 3 shows the combined weekly quantities of merino wool sold in farm bales (the South African bales are lighter than the Australian average but close enough for this purpose) in South Africa, Australia and New Zealand wool sold in Melbourne. South Africa typically contributes two thirds of weekly volumes.
The volume to date from early October is around 48,000 bales versus 40,000 from the October to December period in 2021, up by 20% but we are not talking about a lot of wool so it is hard to see increased volumes as the reason premiums have dropped by around 80%.
The decrease in premiums may be due to the economic downturn under way or the market may be maturing and has decided paying US250 cents per kg premiums is too high a price for RWS wool. The likely answer is that all three of the factors are involved in some way.
What does it mean?
For Australian producers pondering accreditation to RWS, there is a world of difference between premiums of US250 and US40 cents. It is unlikely the lower premium will drag many Australian farmers who mules or use mulesed sheep “over the line”. The supply of average to broader than average, RWS accredited, merino wool in Australia will remain at low levels. In the meantime we wait to see at what levels these premiums will settle at over a full economic/wool price cycle.
- South African reported premiums for 19.5 micron merino wool are trading around US40 cents, down from US250 cents a year ago.
- Australian premiums looked to have followed the lead of the South African market.
- At this stage it is uncertain why the premiums have shrunk by 80% and whether the drop is permanent or not.
Click on figure to expand
Data sources: Cape Wools, RBS, AWEX, ICS
Photo credit: Megen Wrigglesworth