The Tortoise & the Hare

In any market analysis the competing effects of supply and demand, and the balance between these “facts of economic life” are what, over time, determines the direction of the market.

Negative impacts on a market can be broadly sheeted back to oversupply, or falling demand, while the opposite would be positive influences on the market. Historically, wool has suffered from “black swan” economic world events.

Reflecting on the conditions currently impacting the wool market, and what might be its eventual direction, I recalled the famous Aesop Fable, The Tortoise & the Hare. The story is the account of a race between unequal partners, with what at first appears to be an obvious mismatch with an obvious outcome. However, in the end, delivers an unlikely result.

These are uncertain times.

With the current wool market, we have the uncertain and enormously negative influence of Coronavirus (now named Covid-19) causing our major customer to almost completely close the trading, importing and processing activities that the Australian wool market relies on.

There are also the shifting sands of trade, with the use of newly introduced tariffs and sanctions again removing certainty and confidence. The National Council of Wool Selling Brokers (NCWSB) reports that as a result of the “tit-for-tat” China-US trade ructions, an additional 15% tariff was applied to Chinese exports of apparel wool to the US last September. As a result, the quantity of US imports of wool clothing from China slumped by 44% year-on-year in October and by a further 34% in November.

“While this has been offset by a pick-up in exports from other countries, the scale of the Chinese influence on the global wool market left US imports down 17% in quantity and 15% in value for the September to November period”, the NCWSB said.

The problems for wool trade are a bit like the hare in Aesop’s race. It’s a fast moving issue, there is a lot of conjecture about what might happen, uncertainty reigns and given past “black swan” events, the obvious impact is a severe price correction.

What is the tortoise in this current wool market situation?

Unlike previous economic shocks impacting on the wool market, supply is dramatically lower.

Since 2000 the Australian flock has almost halved. On top of that, Meat & Livestock Australia are projecting a further fall this year of 5.7% to 63 million sheep. The flock today is at 100-year lows, in fact, the last time it was at this level was 1898!

However, this falling flock has produced more lambs for slaughter as sheep producers respond to strong sheepmeat demand and improving prices.  As reported by Mecardo, in the past 20 years a falling flock has produced almost 20% more lambs for slaughter.

The obvious point to this is that most of the decline in sheep numbers has been to the Merino flock, and to the wether component with now a greater percentage of ewes retained for prime lamb production. Both reducing factors on wool production.

This year wool sales at auction are tracking 7,000 bales fewer than for the same period in the 2018-19 season. This is on the back of last year’s decline of 7,000 bales on the previous season.

Overlaid on this reducing supply has been wool producers’ approach to selling, or not.

This season to date 17.4% of offered wool has been passed-in at auction, compared to an average of 9.5% last season. Growers are prepared to hold out of the market this year, and with 2 to 3 years of good wool prices behind them. Coupled with very good prices for any sheepmeat sales they are confident in punting that the wool market will at least hold these price levels if not rise. The minute buyers reduce prices growers are happy to step back from the market.

A further impact on supply is the reported low stock inventory in China, with mills reducing reserve holdings and shifting to “just-in-time” supply as a modern financing model.

So, while the negative market influences run amok, seize our attention and cause nervousness (like the Hare), the limiting of supply continues to play on the market holding things steady (the Tortoise).

As an example, in late September last year when the market fell 100 cents, sellers responded by passing 33% of the offering. They then reacted to a rising market by selling on average 45,000 bales in the first two sales of 2020.

Will the wool market, like the tortoise, with a steady and consistent approach in a low supply environment, ride out the problems, to come through the winner? Or are these still to be played out economic shocks going to eventually overwhelm the low supply environment and topple the market. Does the tortoise or the hare win?

These are unprecedented times for the wool industry, will it succumb eventually to negatives, or do we now have a unique situation where our limited and limiting supply can endure these “left field” events?

Commodity conversations

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Sheep flock and forecasts
Lamb slaughter and forecasts

Sources: Mecardo

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