In November Mecardo looked at discounts for vegetable fault, as the market moved into its seasonal low period of supply for this fault. Now the market is moving into the period of high supply for vegetable fault so it is time to look at the discounts again.
A couple of weeks ago Mecardo looked at how swings in the level of vegetable matter (VM) in the clip impacted on the ability of exporters to construct consignments where for many orders the average VM level is typically 1%, with an upper limit on the VM of individual lots of 1.8-2%. (view article here) The practical effect is that discounts for higher VM wool increase and decrease in large part (but not all) to this change in the supply of VM.
Figure 1 shows the discount for 4.1-7% 21 micron merino combing fleece to a base 21 micron combing fleece price which has a VM range of 0-2%. These series have quite a wide range of staple length and strength which will introduce some variation into the comparison but we are only looking for the bigger influence of VM. Discounts reached extreme levels in August before shrinking towards the end of the calendar year. They have since widened again, not quite to the extremes of last August but still wide. In percentile terms (for the past 20 years) the cents per kg discounts is sitting at its 14th percentile and the percentage discount is sitting at its 19th percentile. In other words they have spent 80-85% of the past two decades (most of the time) at narrower levels.
Figure 2 repeats the exercise for 19.5 micron. The current discount is smaller than extremes seen in recent years but the 20 year percentile levels are sitting at the 14th and 28th percentile respectively for the cents per kg and percentage discounts, so the discounts are substantial.
Finally in Figure 3 the exercise is repeated for 17 micron. VM discounts for 17 micron are well short of the peaks seen last spring. In percentile terms the absolute (c/kg) discount is sitting at its 79th percentile for the past 20 years and the percentage discounts at its 88th percentile. While the absolute VM discounts for 17 micron are well above the levels for the broader micron categories, for 17 micron these VM discounts are relatively small by the standards of the past two decades.
In the final schematic (Figure 4) the average VM level for combing fleece of 17, 19 and 21 micron is shown from 2000 onwards. In the current market the VM level for 17 micron is well below that of 19 micron which is in turn below that of 21 micron.
What does it mean?
Discounts for fine merino for a range of qualities remain small – a good time to sell. VM levels will increase (and look to be already for fine merino) which will put some pressure on fine merino discounts to widen. For medium and broader merino VM discounts are here to stay until the spring when some relief in terms of VM supply (lower) helps relieve the pressure.
Key Points
- VM discounts for 19 and 21 micron fleece wool remain at high levels by the standards of the past two decades.
- In contrast the VM discount for 17 micron has been tracking at relatively low levels for fine merino wool.
- The supply of VM will be ample in the coming months helping to maintain or increase VM discounts.
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: AWEX, ICS, Mecardo.
