Market Morsel: A fine easing
Fine merino prices continued to ease this week, despite there being some solid interest for well specified wool, especially if accredited to a quality integrity scheme. The 19 to 22 micron categories also eased, by smaller amounts, in both Australian and US dollar terms. At this stage it is hard to distinguish between the effect of the normal spring doldrums and the weakening economic backdrop.
In practice both factors will be bearing down on the greasy wool market. A deteriorating economic backdrop to the market is likely to remain the key issue for prices in the coming quarters, however there are grades of economic weakness and it is not clear yet how much demand will shrink.
The economic problems in China will continue to be a good test to the oft quoted line that China is the biggest consumer of Australian wool. China is a vast, complex place but the economic challenges it faces in the next few years are daunting. Perhaps the weakness in the domestic Chinese economy is showing up in the depressed crossbred prices, which have not recovered from a drop in prices at the beginning of the pandemic in 2020.
The price ratio of the 17 to 21 MPG has fallen from around 2 in April/May to 1.8. Since 2003 a ratio of 2 (the 17 MPG twice the 21 MPG) has been the effective upper limit for this ratio. It has spent the past year near this level and now looks to be falling, under the influence of weaker demand stemming from weaker economic growth.
Changes in supply are not really an issue for 19 micron wool, as it is in the centre of the merino distribution. Given the latest AWPFC forecast volumes should increase by around 5% for the season, although this will depend on what sort of sheep are used to build numbers. Chinese demand for 19-22 micron is reported to be still solid.
The 21 MPG looks as though it will fall another US20-30 cents, before finding support. Exchange rate moves could easily cover most of this fall. The downside risk continues to appear to be minimal.
New Zealand sold 414 bales of RWS accredited crossbred wool in Melbourne this week (101 bales of Australian RWS accredited wool were sold across all centres for the week) showing premiums in the range of 130 cents clean for 27-30 micron.