Australian Wool Annual Review 2018 - Rural Bank
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Australian Wool Annual Review 2018
About the research About Rural Bank
The Australian Wool Annual Review includes data and outlooks on Rural Bank has been a wholly-owned subsidiary of Bendigo and
production in Australia, seasonal conditions, prices and demand. Adelaide Bank Limited since 2010. It is the only Australian-owned
Significant effort has been taken to secure the most recent and operated dedicated agribusiness bank in the country, providing
data available. exceptional financial services, knowledge and leadership for
Australian farmers to grow.
About Ag Answers
Ag Answers is a specialist insights division of Rural Bank.
Recognising that good information is the key to making good
business decisions, Ag Answers provides research and analysis
into commodities, farmland values, farm business performance
and topical agricultural issues to enable farmers to make
informed decisions.
This report is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s).
The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Rural Bank Limited, ABN 74 083 938
416 AFSL / Australian Credit Licence 238042 makes no representation as to or accepts any responsibility for the accuracy or completeness of information
contained in this report. Any opinions, estimates and projections in this report do not necessarily reflect the opinions of Rural Bank and are subject to change
without notice. Rural Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion,
forecast or estimate set forth therein, changes or subsequently becomes inaccurate. This report is provided for informational purposes only. The information
contained in this report does not take into account your personal circumstances and should not be relied upon without consulting your legal, financial, tax or
other appropriate professional.
© Copyright Rural Bank Ltd ABN 74 083 938 416 and Bendigo and Adelaide Bank Ltd ABN 11 068 049 178 (RBL18954) (03/18)
2
Summary
Australian wool growers can look forward to another year of strong Australian wool exports have increased in both quantity and value
prices as market fundamentals remain favourable for sellers. over the past three years. A total of 348,126 tonnes of wool was
exported in 2017, up six per cent compared to the previous year. In
The positive outlook for 2018 builds on a record breaking year in value terms, wool exports were worth $3.65 billion dollars in 2017,
2017. The AWEX Eastern Market Indicator (EMI) reached 1830 representing an increase of over 20 per cent year on year.
cents/kg clean in early March 2018, a record high in nominal terms
China still accounts for most of Australia’s wool exports – over 77
and 30 per cent higher than a year ago.
per cent of Australia’s exported wool by volume.
Australian wool production has increased slightly, with greasy weight
The weather outlook for autumn and early winter suggests
production up 2.1 per cent (AWTA, 2018) compared to this time conditions are likely to be close to median rainfall and temperature
last year. The national flock is also increasing following consecutive for most wool growing regions. The current vegetation and soil
seasons of favourable conditions. The number of sheep shorn in moisture maps show that western New South Wales and much of
2017/18 is expected to be up 1.7 per cent (AWI, 2017). Victoria are entering autumn with below average soil moisture.
3
Australian production
Wool production in Australia is slowly rising as farmers seek to build Australia’s sheep flock is estimated to be 73.6 million head this year,
sheep flocks in response to current high wool, lamb and mutton and is expected to increase to 76.6 million in 2018-19 (ABARES
prices. Nevertheless, national production remains well below the 2018). Despite this growth, the flock is still much smaller than a
1989/90 peak. decade ago.
Australia’s shorn wool production is expected to rise by 1.4 percent There will be no supply shock to perturb the market for fine to
in 2017/18 to 345,000 tonnes (AWI 2017). medium wool. The majority of Australia’s wool clip is at the fine end of
the micron spectrum. Sixty per cent of production so far this financial
Wool production has dropped by almost 50 per cent over the last
year has been 20.5 micron or finer (AWTA, 2018). The majority of the
20 years, but there are signs that a trend toward increased production
increase in wool production will be related to the increase of meat
is emerging, with 2018 expected to be the third consecutive year of
breeds in the flock. Accordingly, the impact of flock growth on fine
production growth. According to ABARES projections for Australian
wool production will be limited, suggesting that the fine to medium
wool production, it appears that the two decade long trend of
wool market will not experience a rapid jump in supply.
declining wool production is starting to reverse.
So far this season, the average number of bales sold is 42,000 per
Production in Tasmania, Victoria and Queensland is expected to
week, up almost 10 per cent from 38,200 last season. This shows
increase in 2018. Western Australia is expected to record reduced
that farmers are taking advantage of prices and trying to get wool
yield per head in 2017-18 as a result of the drier seasonal conditions
shorn and out of storage as promptly as possible.
experienced compared to 2016-17.
Wool production is beginning to show signs of reversing the declining trend
500
450
400
350
300
Thousand tonnes
250
200
150
100
50
0
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
New South Wales Victoria Queensland South Australia Western Australia Tasmania Data: ABARES, AWI
The Australian sheep flock is expected Australian wool production is concentrated
to continue to grow at the fine end of the scale, although
production growth will largely be in the
85 50 medium and broad micron ranges
80
40
thousand tonnes
75
Million head
30
70
20
65
60 10
55 0
2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 30
Data: ABARES micron Data: AWTA
4
International production
Australia is one of the world’s largest wool producers, but still faces Wool production in China is expected to increase in the medium term,
competition from other producers such as New Zealand, South Africa although the majority of Chinese production growth is going to be
and China. in broader micron wool, reflecting China’s current policy to develop
and promote beef and sheep meat production. This is expected to
New Zealand’s 2017-18 sheep flock is expected to be slightly smaller
increase supply of broader wool and maintain pressure on broad
than the 2016-17 season. Nevertheless, production is forecast
wool prices.
to rise as a result of the expected increase in yield per head. The
flock is expected to be 27.3 million head, down 0.9 per cent on last Although cotton and synthetic fibres are not perfect substitutes for
year, and down almost 40 per cent since 2000. The value of New wool, they do compete. The share of cotton in blended fabrics can be
Zealand’s wool exports is expected to rise 16 per cent on last season increased especially when cotton prices are cheaper relative to wool.
due to the increase in production as well as price (Beef and Lamb Currently, the price differential between fine to medium wool and
New Zealand). cotton is being contained by a concurrent increase in cotton prices.
The New Zealand sheep flock largely comprises meat breeds, which World cotton production is expected to rise by 13 per cent in 2017/18
typically produce broader wool. This has meant that increasing fine and a further three per cent next year (ABARES). The largest
and medium wool prices are not flowing through to New Zealand’s producers of cotton around the world are India, China and USA, all of
wool industry to the same extent as in Australia given New Zealand’s which are expected to increase production and quality in the next few
smaller exposure to the fine wool market. years (ABARES).
While almost two million bales were offered at Australian wool
auctions in 2017 with a clearance rate of 92.7 per cent, just under The New Zealand sheep flock continues
500,000 bales were offered in for sale in New Zealand and just over
to decline
300,000 in South Africa, with clearance rates of 77.6 per cent and 32
97.5 per cent respectively.
31
30
million head
29
28
27
26
25
2013-14 2014-15 2015-16 2016-17 2017-18
Data: Beef and Lamb New Zealand
World cotton production is expected to
grow but then stabilise
30
28
26
24
million tonnes
22
20
18
16
14
12
10
2015-16 2016-17 2017-18 2018-19 2019-20 2020-21
Data: ABARES
5Demand and trade
International demand for wool is contributing to the strength of wool The Australian wool industry benefited from additional export value
prices in the Australian market. This is apparent in high clearance rates to Italy in 2017, which rose by 40 per cent compared to the previous
at Australian wool auctions, growing export value and growing demand year. The volume exported to Italy increased only 7.5 per cent over the
for wool based products. same period.
In 2017, there was 348,126 tonnes of wool exported for a total value Australian wool exports are also benefitting from the favourable
of $3.65 billion. This rise in export value can be mainly attributed to exchange rate. ABARES has forecast the Australian dollar to remain
China, which accounts for approximately 77 per cent of Australian relatively low at an average of approximately 0.74 USD over the next
wool exports by volume. The value of wool exported to China in 2017 five years.
increased by 24 per cent compared to the previous year.
Innovations in wool products such as fake fur and sports and active
On a price basis, Switzerland was the highest price market for wear are driving up demand. This is in addition to population and
Australian wool exports in 2017 at over $69,000 per tonne, albeit only wealth growth demand drivers, which are particularly apparent in China.
for two tonnes of wool. The average price of wool exported to Italy was
The sportswear industry is growing rapidly, and this trend is expected
a more modest average of $16,000 per tonne, but notable as the first
to continue in the future. The characteristics of wool are ideal for
of the premium wool export markets to trade a substantial volume of
sportswear, as it is able to stretch, absorb moisture, be stain resistant,
wool, approximately 14,500 tonnes in 2017.
and reduce unpleasant odour. The expected growth in sportswear
The majority of Australia’s wool export income comes from 19 micron is encouraging wool manufacturers to create products that take
and finer wool, which accounts for over 48 per cent of Australia’s wool advantage of the growing industry. The value of the sportswear market
export value. The value of Australia’s exported wool over 24 micron in China alone is expected to nearly double between 2015 and 2020.
contributed just over six per cent of Australia’s total wool income in
2017, illustrating the widening price gap between broader micron wool
and fine micron wool.
China accounts for most of Australia’s wool exports Australia’s wool exports are
400 largely fine to medium categories
350
thousand tonnes
300 180
250 160
200 140
thousand tonnes
150 120
100 100
50 80
0
World China Italy India Czech Rest of the 60
Republic World 40
2015 336,838 254,131 14,044 23,504 15,475 29,685 20
2016 328,438 249,256 13,374 22,682 15,093 28,031 0
2017 348,126 270,547 14,397 20,279 17,254 25,650 Fine Medium Broad
Data: GTIS 2015 2016 2017 Data: GTIS
The Australian dollar is still favourable to exporters China’s sportswear sales are
expected to increase in the future
1.2 40
1.1 35
1 30
25
AUD/USD
billion USD
0.9
20
0.8
15
0.7 10
0.6 5
0.5 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2015 2020
Data: RBA Data: Goldman Sachs/The Economist
6Prices and farm performance
The Australian wool industry is still experiencing steady price rises Record breaking nominal wool prices in recent years are flowing
in fine and medium micron categories, however the price of broad through to the improved financial performance of wool enterprises.
micron wool is remaining steady.
The sheep industry has performed better over the past couple of
The wool market is expected to remain strong. The current AWEX years as a result of the higher prices received for livestock and wool,
EMI forecast, which is based on the performance of the indicator over as well as good seasonal conditions.
recent years, suggests that the AWEX EMI is likely to stay above
Farm cash income from sheep enterprises is expected to reach the
1800 c/kg over the year ahead.
highest level in 20 years, and is expected to be 35 per cent higher
In nominal terms, Australian wool prices eclipsed record after record than the average cash income for the last financial year (ABARES).
during 2017 and carried that momentum into 2018, with the AWEX Recent ABARES projections have predicted that the cash income of
EMI reaching 1830 cents/kg clean in early March 2018. The Western sheep farms is expected to remain high over the next couple of years,
Regional Indicator closed February 2018 at 1912 cents/kg. Both prices barring the occurrence of drought or other shock changes to the
have risen by over 15 per cent since the start of the financial year. industry. The predicted high cash income is based on the ABARES
forecast that the price of wool and livestock is expected to remain
In real terms, the AWEX EMI is at its highest point since 1990.
high over the next few years.
The record value was set in 1987-88 season, when the AWEX EMI
averaged 2612 cents/kg when expressed in 2017-18 dollars, Farm management deposit (FMD) contributions can also be a good
48 per cent higher than the price at the end of 2017 (ABARES). indication of how an industry is performing. The FMD balance for
sheep businesses has increased by over $100 million in the past four
Both the 17 micron and 20 micron price guides have lifted by over
years, reflecting a succession of profitable seasons (Department of
15 per cent since July last year. The broader wool markets have
Agriculture and Water Resources).
remained relatively stable over this financial year. 28 micron wool is
currently over five per cent higher than the price at the start of the The price of cotton has trended higher over the past three years,
financial year, but is unlikely to see growth any greater than that. This which should assist the price competitiveness of wool. ABARES have
is due to the increase in production from crossbred sheep in Australia, forecast that the cotton price is going to rise by five per cent next
New Zealand and China in a market that already has limited demand. season, as a result of demand as the economy improves.
Lamb and mutton prices are still slowly trending upwards following
lows at the start of 2013. ABARES have forecast an increase in lamb
and mutton price over the next two years, but expect the price to
decline slightly in the long term.
The AWEX EMI is likely to hold on to 2017’s gains
2750
2500
2250
2000
EMI cents/kg clean
1750
1500
1250
1000
750
500
95% confidence level
250 68% confidence level
0
Jan -19
Jan -11
May -11
Sep -11
Jan -12
May -12
Sep -12
Jan -13
May -13
Sep -13
Jan -14
May -14
Sep -14
Jan -15
May -15
Sep -15
Jan -16
May -16
Sep -16
Jan -17
May -17
Sep -17
Jan -18
May -18
Sep -18
Data: AWEX, Ag Answers
7Prices and farm performance (continued)
Mutton prices are expected to remain strong
700
600
18-24kg cents/kg cwt
500
400
300
200
100 95% confidence level
68% confidence level
0
Apr -19
Jan -13
Apr -13
Jul -13
Oct -13
Jan -14
Apr -14
Jul -14
Oct -14
Jan -15
Apr -15
Jul -15
Oct -15
Jan -16
Apr -16
Jul -16
Oct -16
Jan -17
Apr -17
Jul -17
Oct -17
Jan-18
Apr -18
Jul -18
Oct -18
Jan -19
Data: MLA, Ag Answers
Broad wool categories have not experienced
the same price increase as fine wool
2000
28 micron and cardings cents/kg
1500
1000
500
0
2011 2012 2013 2014 2015 2016 2017 2018
North South West (Mer. Cardings) Data: AWEX
Farm cash income of sheep farms is expected
to increase again this financial year
180,000
160,000
140,000
120,000
dollars
100,000
80,000
60,000
40,000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018F
Data: ABARES
8FMD balances for sheep businesses are growing
in response to good seasonal conditions
350
300
250
million dollars
200
150
100
50
0
Jan -14 Jan -15 Jan -16 Jan -17 Jan -18
Data: ABARES
Cotton prices have also been trending higher in recent years
2.2
2
1.8
USD/kg
1.6
1.4
1.2
1
Jan -14
Mar -14
May -14
Jul -14
Sep -14
Nov -14
Jan -15
Mar -15
May -15
Jul -15
Sep -15
Nov -15
Jan -16
Mar -16
May -16
Jul -16
Sep -16
Nov -16
Jan -17
Mar-17
May-17
Jul -17
Sep -17
Nov -17
Jan -18
Data: Ycharts.com
9Price table
March - 18 March - 17 5 - year average 80th percentile 20th percentile
MARKET INDICATORS (CENTS/KG)
Eastern 1778 1500 1316 1506 1068
Western 1859 1547 1353 1491 1109
17 MICRON (CENTS/KG)
North 2802 2182 1765 2296 1346
South 2758 2133 1763 2271 1328
West (18 micron) 2259 2026 1587 1992 1258
21 MICRON (CENTS/KG)
North 1887 1508 1383 1503 1161
South 1883 1504 1389 1506 1164
West 1884 1493 1370 1472 1166
28 MICRON (CENTS/KG)
North 808 733 741 789.8 644
South 820 736 745 803 701
West (Merino cardings) 1269 1230 1049 1177 755
MERINO LAMB 16-22KG (C/KG)
Eastern states indicator 598 563 480 559 405
MUTTON 18-24KG (C/KG)
Eastern states indicator 432 427 341 405 270.8
AUSTRALIAN DOLLAR
AUD/USD 0.77 0.77 0.82 1.03 0.76
COTTON (USD/KG)
Cotlook A index* 1.95 1.88 1.73 1.91 1.53
*4 year average
80th percentile indicates that 80% of the data is below the value shown
20th percentile indicates that 20% of the data is below the value shown
Source: MLA, AWEX, Alpha Vantage, Ycharts.com
10Seasonal conditions
The three month rainfall outlook for Australia is for most areas to The climate factors behind this outlook include the breaking up of the
receive around median rainfall. The temperature outlook shows that recent La Nina event, with the El Nino-Southern Oscillation (ENSO)
there is a high chance that the median temperature will be exceeded currently set at neutral. However, the effects of a neutral ENSO may
for Tasmania and the western district in Victoria, and close to average be offset by the warm water temperature in the Tasman Sea, which
temperatures elsewhere. may add moisture to any low pressure systems that may occur later in
the year.
The summer rainfall for wool producing areas was variable, with most
of Western Australia receiving above average rainfall, but eastern The normalised difference vegetation index (NDVI) shows that the
South Australia, northern New South Wales, western Victoria and majority of wool growing regions currently have below average
central Queensland getting well below average rainfall. The majority of vegetation, with the worst affected areas being South Australia and
Australia’s wool producing country experienced a hot summer, with the parts of Western Australia. The Australian Root Zone soil moisture map
mean temperature anomaly for most wool regions being between one shows that the south-eastern side of Australia currently has below
to three degrees above average, with the worst affected areas being average soil moisture. The NDVI and root zone soil moisture maps
central Queensland and central New South Wales (BOM 2018). indicate that there is a lack of feed available in some parts of Australia.
Summer rainfall deciles Rainfall outlook
Source: Bureau of Meteorology, 2018 Source: Bureau of Meteorology, 2018
Normalised difference vegetation index anomaly Australian landscape water balance
Source: Bureau of Meteorology, 2018 Source: Bureau of Meteorology, 2018
11For report enquiries: AG ANSWERS P 1300 796 101 E ag.answers@ruralbank.com.au For banking enquiries: RURAL BANK P 1300 660 115 W ruralbank.com.au ELDERS P 1300 618 367 E bankmarketing@elders.com.au
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