Commentary on the greasy wool market often revolves around the volume of wool offered for sale in Australia, and a recent question to Mecardo asked specifically about the possible effects on price of low offerings in the lead-up to the Christmas recess. This article takes a look at the relationship between weekly offer volumes and the EMI.
Firstly, what proportion of clean wool supply does the Australian auction market account for? Table 1 uses IWTO estimates for wool production by micron range (not necessarily breed) to arrive at a production share for Australia. In the fine micron category, Australia accounts for half of production. If the scope is limited to merino production from the southern hemisphere exporters, the share rises to 75%. Table 1 also shows the share of 24.6 to 32.5 micron (17%) and greater than 32 micron (3%). Table 1 shows that the Australian supply of crossbred wool ranges from minor to insignificant.
Figure 1 shows weekly auction volumes in Australia and the closing Eastern Market Indicator (nominal terms), which is a good estimate of the average price of wool sold at auction. In visual terms it is a messy graph, which is the point. The relationship between the EMI and weekly volumes is messy.
Figure 2 is a scatter plot of the weekly offer volume (horizontal axis) and the change in EMI (vertical axis) for the past decade. There are certainly some weeks when a low volume is associated with a rise in the EMI and some weeks when high volumes are associated with a fall in the EMI. However, there is no clear relationship where volume influences the change in EMI.
Figure 3 is a scatter plot for the change in volume and change in EMI. A regression line is superimposed on the plot and does show a weak relationship between the change in volume and EMI. The weak relationship between changes in weekly offerings and price reflects the importance of context for the greasy wool market. Context includes the make of the wool offering (at this time of the season the proportion of merino is falling quickly, crossbred increasing), whether demand is weakening or strengthening (what is the trend in price), whether other regions are offering wool for sale, stock levels along the supply chain, and finally the clearance rate achieved at Australian auctions.
Weekly offer volumes are a solid piece of market information which is widely available. While it is tempting to use available information to base price expectations upon, weekly offer volumes are one factor among many which determine price levels.
What does it mean?
Supply is a key driver of relative prices in the greasy wool market (premiums and discounts) and also in the apparel fibre markets (price ratios). Supply in this sense refers to the volume of wool across seasons, not the week-to-week fluctuations in offer volumes. Occasionally, weekly volumes are going to play an outsize role in price, the challenge is to know when.
Key Points
- Weekly offer volumes at Australian greasy markets have a weak relationship to the EMI.
- Australian auctions supply a significant proportion of merino wool, but are a minor source of crossbred wool
- Weekly Australian auction volumes are one factor among many determining wool prices.
Click on figure to expand
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: AWEX, IWTO, ICS, Mecardo
