Vegetable matter discounts follow supply

Nutrien Ag Solutions wool shearers.

The auction market, with its combined functions of price discovery and blending, constantly adjusts relative prices for different sorts of wool as supply changes. With vegetable matter (VM) on the rise, this article investigates VM discounts for 21-micron merino fleece.

The influence of supply in the greasy wool market can be best seen in its correlation with changing price relativities. This can include rising price ratios to other fibres as the supply of merino wool falls or the ebb and flow of premiums and discounts in response to seasonal changes in the supply of different sorts of wool. Last week Mecardo looked at the supply of vegetable matter (VM) and how it was on the rise as is normal at this time of the season. From this, we can expect discounts for higher VM wool to rise.

In Figure 1 the supply of long (110 mm plus) 21-micron merino fleece with a VM level between 2% and 3% (expressed as a percentage of all merino 21-micron wool sold) is compared to the discount for this category of wool to the eastern 21 MPG, for the past decade. Both series are smoothed over three months. The supply has really picked up since 2021, with the discounts (left-hand axis) widening as a consequence.  In the years leading to 2021, when the supply was negligible, the discount was often quite small, in the range of 1% to 2%. The discount reflected in Figure 1 is really a function of VM and long staple length, but in practice, there is quite a lot of wool with both features being delivered to sale at present.

Figure 2 focusses on slightly shorter fleece (limited to 105 mm long) with a higher VM range of 4.1% to 7%. The discount shown is primarily a function of high VM. The discount (to the eastern 21 MPG) is shown in both percentage and cents per kg terms for the past decade. It is similar to Figure 1 in that the discounts widen noticeably from 2021 onwards. The absolute (cents per kg) discount is interesting as 200-250 cents has been the upper limit. This being the case in 2018 (when the 21 MPG was trading at 2200 cents) and in 2021 and early 2022. It is now back to this range (in percentage terms a discount of 14% to 16%).

We have a fair idea that VM levels will increase through to May and then steady, remaining at relatively high levels through to August, perhaps into September. This means the pressure will be on these discounts to widen, or they may reach a maximum as Figure 2 suggests and simply stay at these levels for the months when VM supply is high.

 

What does it mean?

The VM supply is plentiful, so discounts are relatively wide (for the micron categories where there is ample supply) already. The supply pressure on these discounts will remain through August and September, but they may not widen a lot further if the experience of recent years is a guide. At this stage expect VM discounts to remain near current levels through the spring.

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Key Points

  • Discounts for Vegetable matter (VM) are correlated with supply, although other wool specifications (such as staple length on the current market) can make the price structure more complex.
  • VM supply will increase through to the middle of 2023, and we will have to wait for the Australian spring before it starts to subside.
  • Heavy VM discounts for 21-micron are already near their maximum level of recent years.

Click on figure to expand

Click on figure to expand

Data sources: AWEX, ICS, Mecardo,

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