Wool and Merino Sheep Star in Stellar Year

with Robert Hermann

Supply

Twelve months ago, we were predicting a “water-shed year” for Merino sheep and the wool industry. The drought across the sheep grazing areas had broken, and it was expected that the pressure of increased supply of fine wool because of the drought would ease.

It was also thought that the decline in the flock would end, and for a short time this was the case with the monthly sheep turnoff percentage falling below the critical 10.5% level facilitating a flock increase. Fig 1.

Unfortunately, much of the sheep producing areas of QLD & NSW suffered again with below average rainfall, with the off-take again lifting as sheep producers sold off to adjust for the dry conditions.

In terms of supply we are in an unusual situation compared to the past 50 years; there is no evidence of a wool stockpile at any stage of the wool pipeline. Producers have for some time been disposing of wool as soon as possible encouraged by the improving market. This is evidenced by extremely low stocks of grower wool in broker stores. Exporters have been reluctant to build any pipeline stocks also; the rising price means greater requirements of cash to trade so they too have been more inclined to operate on a “just in time” trading model.

This has caused an interesting dynamic; on weeks where the market has retraced growers have increased the Pass-In rate, easing the pressure on price. The result has been that within a couple of weeks the market has resumed its positive direction and growers then sell vigorously clearing wool that was previously held. For the first time for many years this is creating a market without any stock overhang and a true “supply/demand” price signal.

Price

The challenges on farm were made a lot easier with the wool price over 2017. All micron categories felt the benefit of year on year higher prices except for broad crossbred types.

To illustrate, the 19 MPG (which is now the median micron range for the Merino clip) began the year at 1630 cents posting steady improvement throughout the year to be above 2000 cents by the end of November. Importantly in US$ terms the improvement also came; around a US 300 cents lift for the year indicating that demand is sound and improving. Fig 1.

The benchmark EMI had a 22% improvement, rising from 1378 to 1676, with a similar % lift in US$ terms. The biggest movers were micron ranges finer than 18 microns, where 30 – 40% price increases were evident. The growing demand over the last decade was always there for finer wool, lighter fabrics and softer yarns; however, the increased supply because of the prolonged drought was masking what should have been strong price signals. The past year has allowed the price to rally in line with demand and easing over-supply of fine types.

This is also clear when looking at Basis, particularly the basis between 18 & 21 MPG. At the beginning of 2017 this premium sat at 310 cents, and by the end of the year it had doubled to 610 cents. Finally, a reward for fine wool producers who had maintained their flocks.

Cardings followed a very good 2016 with another outstanding performance, over the year improving 21% or 225 cents. This was on the back of a rally that first broke through the 1,000-cent mark in May 2015.

It was a tale of two markets for crossbred types; 30 & 32 MPG’s lost 7 – 8% over the year, while finer X bred types showed a 5 – 8% year on year improvement.

Demand

Clearance of bales through auction for 2017 averaged 39,424 per sale week, compared to 38,869 for 2016. There is also evidence that the long dominance of China for wool exports started to ease, with the traditional European destinations becoming more active especially in the fine end of the clip. This trend is welcome, and will be watched with interest in 2018 with an increase in diversity of destination hoped for.

The side dish

The super-fine end of the clip tends to follow similar price cycles to cashmere. This seems logical, both are elite fibres however the market place is small. While the prices track together generally, there are times of break-out which can provide a view of future market moves.

During 2017, the 16-micron price has rallied while the cashmere price has remained stable. This has resulted in cashmere prices appearing to be more attractive than 16-micron wool; although the difference is not extreme. Fig 1.

The current price difference (Basis) is suggesting that in the absence of cashmere prices rallying, there is little scope for further improved prices for its wool counterpart. Of further consideration, the dry conditions experienced in Eastern Australia recently will produce slightly more fine wool which could cause prices to soften.

While demand at present is more than adequate to handle current supply, the best hope for further fine wool price lifts in the face of increasing supply is for cashmere prices to lift.

Sheep prices

This has been another stellar year for sheep and lamb sales. While the specialist prime lamb producers have benefited, the increased prices have also been felt by merino producers. Mutton prices have remained above 400 cents CWT for most of the year, peaking in the winter above 500 cents for the National Mutton Indicator.Fig1.

Of significance is the November rally, usually the increased supply of lamb & mutton in the Spring causes prices to ease, this year we have seen a 25% rally between October & November.

Much of the mutton demand is emanating from South East Asia, where the consistency of mutton is perfect for slow cooked dishes; providing the meat protein and flavour while holding its texture in the dish. With the growth in income and corresponding appetite for increased protein in this region the outlook for mutton is very good.

Previously we have noted the improved price of Merino lambs sold through the auctions, especially relative to Trade Lambs. This trend has continued, and with strong demand for lamb is likely to continue.

The Middle East has been significant in building this demand; a Merino lamb is ideal for the “bagged” export lamb market.

There is an incentive for Merino breeders to focus their selection on meat traits in conjunction with wool production, as the resulting revenue from a Merino lamb suitable for slaughter is a handy bonus to the wool income. Merino studs and flock managers have responded well to this opportunity, and it will contribute in the future to greater profitability as well as reduced price volatility and risk.

Key points

  • The wool market has built on the improvement in price over 2017
  • This is also reflected in our customer’s bid prices indicating good demand
  • Fine wool premiums are returning to attractive levels
  • Merino lambs are providing significant additional income

What does this mean?

The Merino flock over recent years has declined steadily, however the good season, improving wool prices (along with a resurgence in fine wool premiums) should see the flock at least stabilise with the potential to increase.

The “fight for acres” has favoured cropping over sheep since the early 1990’s however the recognition that sheep pose a significantly lower risk when seasons fail, plus the improved returns from Merino sheep will see this battle on a far more even keel. In fact, there are now wheat growers who are considering the re-integration of sheep into their crop programs as a supplement to grain income as well as a diversification of revenue.

Overall 2017 has set the scene for a positive outlook for Merino sheep and a reason for optimism for the sheep and wool industry.