Drought in Australia

Impacts of drought in Australia for the wool industry

At the Schneider Group, we believe that a close connection and regular exchange of ideas with wool producers is of mutual benefit to both sides of the wool business. In March 2019, a team of staff members from Europe and Australia traveled throughout Australia and New Zealand to meet with wool growers. As usual, we have learned a lot during this trip and wish to share some of the insights we have gained. In this blog post, we will talk about the dreadful drought castigating many Australian farms.

A severe drought in Australia for several seasons

Australia has been in the grip of a severe drought following the 2016/17 summer of record high temperatures and a record dry winter of 2017. The high temperatures and low rainfalls have led to severe drought across the eastern part of Australia, the exception being Tasmania.

Consequences on farm

As a consequence, wool growers had to adapt to the situation with several strategies in order to maintain a healthy flock and to continue operating their business. Many had a supply of supplementary feed ‘on hand’ as security for such events but the severity and longevity of this drought has proven very problematic. The financial strain of a long term supplementary feeding program has been crippling on many sheep and wool producers. The unfortunate consequence for the majority of growers was to reduce sheep numbers in their flock in order to care for their land assets and to maximize the health and productivity of their remaining flock.

We met with wool growers who have reduced sheep numbers by as much as 30% (total annual production in the state of NSW is down 20% year on year). Having to reduce sheep numbers has, of course, a long term effect on wool production and future income but still is a necessary step to take for the wellbeing of the animals.

The other step many growers had to undertake was feeding sheep with hay and grain, wherever paddocks were running too dry for grass and shrubs to grow. When we visited growers during our trip, we learned that many growers have been feeding their sheep for over 18 months. This necessity has of course also a huge financial impact for the grower’s business as prices for hay and grain have more than doubled. One grower explained that feeding one sheep for one week costs him around 3 AUS$, a cost that accumulates quickly over a long period of time as the drought continues. Water resources were also reportedly of concern but some welcome rain in recent weeks should help in this situation.

Consequences for wool

The drought not only has a huge impact on growers and their sheep but also affects the wool grown. The reduced nutrition for the sheep reduces the quality of the fibre they produce. The severe weather conditions impact the tenderness of the wool, making it more prone to break. Staple strength is an important qualitative characteristic of wool during the combing, spinning and weaving process. Meeting with wool growers across the country, gave us the opportunity to jointly discuss this challenge. One way to work with the increased tenderness is to start the shearing season earlier and therefore decrease the length of the fibre. This helps in managing the reduced staple strength during processing. Some growers also contemplated this to take advantage of the wool market to help finance the cost of feeding sheep. Others are shearing early before offloading excess stock as they head to another tough winter.

With very dry surfaces for the sheep to graze on, the wool also accumulates more dust within the fleece. For top makers, this is another challenge to manage during the scouring process. Processing costs relating to more regular cleaning of the water and the scour bowls add to the processing expense. As such topmakers generally have higher processing charges for lower yielding wools. The process of scouring is very important and the cleanliness of the wool tops for the spinner is also a major requirement.

Consequences for wool industry

With reduced sheep numbers, wool production has already decreased and is forecast to go down even further. For some micron ranges (20.0 / 23.0) the available kg of wool is down by 25% to 40% while there has been an increase in drought-affected fine wool to the end of April 2019. This has impacted on the market with finer micron prices falling while the medium and broader microns have been less affected. For more information on wool prices, see our weekly market reports.

With these low levels of supply, wool prices are expected to stay high. While high wool prices are difficult to hand down to the consumer markets, they are vital to keeping wool growers in business. The wool growers we talked to explained that all money received from wool sales gets directly reinvested into feed in order to keep the remaining sheep healthy and fit.

If you are interested to learn more about the Australian drought and its toll on the Australian wool industry, we recommend you watch the latest AWI video documenting the situation well.

The month of April and beginning of May have brought along some very welcomed rainfall. In the warmer and more arid regions, the rain allows grass to grow back. In colder areas of the country, temperatures are already too low for grass to grow. Sheep health conditions appear to be better compared to last year and wool growers remain committed to their sheep as they take good care for them through the winter. Of particular attention will be the ewes who will be expecting lambs in the spring – the future of the flock.

AUSTRALIAN WEEKLY MARKET REPORT

Comment

The lifting of the ban on exports from South Africa to China this week was a very good result for all concerned. It was a difficult period for the industry, particularly for those directly involved, but also the broader wool community. Whenever the normal flow of wool is compromised by external forces, uncertainty is created. Available finance has been pushed to the limit and variable market prices between the countries made trading conditions extremely difficult. The fact that the South African wool was selling at a discount to Australian prices until now, meant that the lifting of the ban must have been a strong influencing factor determining the direction of the market in Australia this week. Demand through the pipeline was already very poor. Now that the flow of wool is more transparent, we hope to see standard supply and demand factors to play out and for more confidence to return. Just 26,000 bales were eventually sold this week with 21% passed in rate. Growers backing their judgement that prices will remain stable in the medium term as supply will be very restricted. Less than 4,000 bales were sold in Fremantle with 45% of the merino fleece failing to meet grower expectations and will remain in store for another day.

AWEX Eastern Indicator compared with 10/05/2019

Eastern Indicator

Close: 1893

Change in % -3.02%

If you want to learn more about AWEX indicators, visit the official website http://www.awex.com.au

Schneider Indicators compared with 10/05/2019

15 Micron

Close: 2,539

Change in %: -5.24%

16 Micron

Close: 2,394

Change in %: -2.59%

17 Micron

Close:  2,323

Change in %: -2.67%

18 Micron

Close: 2,234

Change in %: -2.51%

19 Micron

Close: 2,161

Change in %: -2.22%

 

Each indicator is expressed by a number representing a market quotation for a selected range of types and is not a price expression and it’s not influenced by currency fluctuations.

Wool indicators are anyway based on Australian Dollar.

If you want to learn more about SCHNEIDER indicators Click here.

Forecast

The staple strength of the offering is actually quite good. According to AWEX figures, despite the drought, one third of the merino fleece offered this week was >40nkt and more than half of the merino fleece with a mid-break < than 50%. It’s the yield that is most restrictive to buyers for China in particular. The cheaper Australian dollar failed to add any support to wool prices.

Auction offering – current week

Selling Centres for week 46

Market          Sale          Offered             Sold       Passed In

North                    S 46                      8431                          7052                   16.4%

South                   M 46                     18302                       15097                  17.5%

West                     F 46                      6420                         3816                   40.6%

 

Auction offering – next week

Market          Sale          Sale days          Volume

North                   S 47                        W-T                             7100

South                   M 47                       W-T                           14032

West                     F 47                        W                                4505

 

If you want to see the complete Wool Sales Roster click here.

FREMANTLE MARKET REPORT

COMMENT

Fleece 20 cents cheaper, skirtings 40-50 cents cheaper, open tops 25 cents cheaper.

FLEECE

Prices for fleece were around 10-20 cents cheaper today, with poor spec wools most affected. It was noticeable that demand for better spec wools was strong and these types sold at similar levels to yesterday.
Fleece again had a very high passed-in rate of 44.6%.

SKIRTINGS

Skirtings again fell heavily and were generally 50 cents cheaper.

OPEN TOP

17.5u and finer open tops were 50-70 cents cheaper, while 18.5u and broader were 25 cents cheaper.

 

NEW ZEALAND MARKET REPORT

Summary

Small miscellaneous offering available

Comment

We are still waiting for new season wools to come onto the market.  The few lots available reflected the Australian market.

FUHRMANN NZ MARKET REPORT

Summary

Market generally firm tending dearer

Comment

South Island only selling today with 11,000 bales on offer.  The selection consisted of 45 percent average style fleeces 33.0 to 39.0 micron, 15 percent lambs good colour, 29.0 to 31.5 micron, bulk 75mm, 15% good style second shear, 35.0 to 39.0 micron, bulk 75mm. Also on offer were 15 percent associated oddments and 10 percent miscellaneous types.  China main with support from the United Kingdom and Australasian carpet mills.

Fleece

Good style 33.0 to 36.0 micron very firm.

Good style 37.0 to 39.0 micron 1% dearer.

Average style 33.0 to 39.0 micron sellers favour.

Second Shears

Good style 33.0 to 36.0 micron very firm.

Good style 37.0 to 39.0 micron 1% dearer.

Average style 33.0 to 39.0 micron sellers favour.

Lambs

First lambs up to 1% cheaper.

Oddments

Good colour firm.

Average colour 5% dearer.

Passings

23% Passed In.

Next Auction

North Island only offering 11,500 bales on 23rd May.

Fleece Summary

– Good style 33.0-36.0
Variation %:  Very Firm

Good style 37.0-39.0
Variation %:  1.0

Average style 33.0-39.0
Variation %:  Sellers favour

Second Shears Summary

– Good style 33.0-36.0
Variation %:  Very Firm

Good style 37.0-39.0
Variation %:  1.0

Average style 33.0-39.0
Variation %:  Sellers favour

Lambs

↓ First Lambs
Variation %: 1.0

Oddments

– Good colour
Variation %: Firm

Average colour
Variation %: 5.0

EASTERN AUSTRALIAN MARKET REPORT

Better market tone.

COMMENT

Focus on better specification with yield a key driver.

FLEECE

17.0 / 18.5 micron good specification very firm.

19.0 / 21.5 micron good specification 0.5% easier.

All tender wool and low yielding types 2% easier.

SKIRTINGS

All 2% easier

OPEN TOP

Nominally 1 to 2% easier.

EASTERN AUSTRALIAN MARKET REPORT

Market cheaper. AUD also continuing with an easing trend against the USD.

COMMENT

The decision of Chinese authorities to lift the ban on South African wool imports was likely to have contributed to today’s market uncertainty in Australia.

FLEECE

Better lots 1% easier.

Good to average specification 1 to 2% easier.

Inferior yield and shorter staple length (<64mm) 2 to 3% easier.

SKIRTINGS

Better lots 1% easier, inferior lots irregular and a little more than that.

OPEN TOP

Nominally 1% easier.

CASHMERE MARKET REPORT

April 2019

CHINA

Due to high prices during the last cashmere season, cashmere demand declined noticeably compared to July 2018. During February and March 2019, prices had reduced slightly. However, once the newly harvested greasy cashmere entered the market in April 2019, prices increased once again reaching the high levels of December 2019. Momentarily the market is quiet due to low availability of cashmere, especially finer fibres. Brokers and processors are nevertheless buying the new season’s offerings even though demand further down the supply chain is still poor.

MONGOLIA

This year the greasy market has opened 13% more expensive compared to last year. Winter has been very dry and without snowfalls, causing high presence of dust, low yield and lower quality in greasy cashmere. The cashmere growing regions have still not had any rain.
Demand for Mongolian cashmere is coming predominantly from China while European buyers have not yet expressed any interest in Mongolian cashmere.

IRAN

Due to very a very unusual spring climate with cold temperatures as well as rain across the whole country, cashmere goats have not been clipped yet. The small quantities being traded these weeks are unsold stocks from last year. Prices have remained unchanged compared to March 2019.

SILK MARKET REPORT

April 2019

CHINA

The new mulberry cocoons came out from Guanxi Province in April of this year. The price is 30% lower compared to last year while production is 35% lower than last year. The market for raw silk shrank noticeably during the last season therefore farmers stopped seeding their silkworms. This leads to a sharp decrease of new cocoons.

AUSTRALIAN WEEKLY MARKET REPORT

Comment

A softening market trend this week in a another very disappointing offering. The impact of the drought on quality and quantity so far this season has been immense. Only 33,000 bales were offered and, on both days, the average market eased a little. The few better lines are attracting competition from a wider range of buyers and are clearly less affected. The EMI lost only 8c this week as crossbred wools continue upward with Chinese demand for these types outweighing supply.

AWEX Eastern Indicator compared with 02/05/2019

Eastern Indicator

Close: 1952

Change in % +0.41%

If you want to learn more about AWEX indicators, visit the official website http://www.awex.com.au

Schneider Indicators compared with 02/05/2019

 15 Micron

Close: 2,672

Change in %: 0.00

16 Micron

Close: 2,456

Change in %: 0.16%

17 Micron

Close:  2,385

Change in %: +0.75

18 Micron

Close: 2,290

Change in %: -1.40

19 Micron

Close: 2,209

Change in %: +0.36

 

Each indicator is expressed by a number representing a market quotation for a selected range of types and is not a price expression and it’s not influenced by currency fluctuations.

Wool indicators are anyway based on Australian Dollar.

If you want to learn more about SCHNEIDER indicators Click here.

Forecast

The general cautious tone across the wool industry isn’t necessarily playing out in the same way on greasy wool prices. It’s been a very difficult trading period. Wool prices are lower, yet relatively stable when considering the reduction in enquiry from our customers. Perhaps this is now starting to change the thought process of those who either need some wool for prompt production or prepare for the new season.

Auction offering – current week

Selling Centres for week 45

Market          Sale          Offered             Sold       Passed In

North                    S 45                      8005                       7303                   8.8%

South                   M 45                     18367                      16006                 12.9%

West                     F 45                      6429                        5267                   18.1%

 

Auction offering – next week

Market          Sale          Sale days          Volume

North                   S 46                        W-T                             8556

South                   M 46                       W-T                            18726

West                     F 46                        W-T                             6079

 

If you want to see the complete Wool Sales Roster click here.