Strong demand tipped to continue

16 Apr, 2018 04:00 AM
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 Rural Bank's head of sales agribusiness, Simon Dundon, predicts sheep farms will continue to have a prosperous year next financial year based on forecasts of wool prices remain high because of demand growing more rapidly than supply and favourable trading circumstances.
Rural Bank's head of sales agribusiness, Simon Dundon, predicts sheep farms will continue to have a prosperous year next financial year based on forecasts of wool prices remain high because of demand growing more rapidly than supply and favourable trading circumstances.

SHEEP farmers are expected to enjoy their best farm cash incomes for 20 years this financial year, primarily because of high returns from wool.

And, according to Rural Bank’s Australian Wool Annual Review, released on Monday, and the Australian Bureau of Agriculture and Resource Economics and Sciences (ABARES) March quarterly commodities review, released on Friday, high wool prices seem set to continue.

A favourable exchange rate, tipped by ABARES to average about US74 cents over the next five years – Australian wool is sold internationally in US dollars – and demand growth outstripping supply growth will ensure good times continue, baring disasters like drought, both reviews predict.

Innovation in new wool products like fake fur and sports and active wear – the value of a wool sportswear market in China alone is expected to nearly double from 2015 to 2020 – will continue to drive demand for wool more quickly than supply can grow, the Rural Bank forecast.

Competitor wool producers like New Zealand are also moving to broader micron wools with more meat breed sheep in their flocks, leaving the finer micron market to Australian woolgrowers.

As well, competitive natural fibres like cotton are also experiencing high prices, helping limit any price-driven swing towards usually cheaper blended fabrics, the reviews pointed out.

According to the wool annual review prepared by Ag Answers – a specialist insights division of Rural Bank – and based on ABARES statistics, average farm cash income of sheep farms is expected to top $160,000 this financial year, a 20-year high and 35 per cent higher than for 2016-17.

Farm cash income is a measure of cash funds generated by a farm business for farm investment and consumption after paying all costs incurred in production.

It is considered a measure of short-term farm performance because it does not take into account depreciation or changes in farm inventories.

Wool exports rising 20pc in value to $3.65 billion and in volume by 6pc in a bumper year last year, coupled with nominal all-time record highs for the eastern and western wool market indicators already this year – previously reported in Farm Weekly – have set the scene for the step up in farm cash incomes.

The reviews pointed out the current-year projected increase also came after four successive good seasons during which farm management deposits for sheep businesses increased by more than $100 million.

Simon Dundon, Rural Bank’s head of sales agribusiness, said woolgrowers could expect growing international demand and strong prices to continue “for the next 12 months”.

“Last year, China imported 77pc of Australia’s wool with a 24pc increase in export value for the year, while export value to Italy also increased by 40pc,” Mr Dundon said.

“As value growth has been focused on finer grade wools and our international competitors predominantly supply coarser wool, we expect prices to remain strong for Aussie wool.”

Mr Dundon said a high auction clearance rate – 92.7pc or an average of 42,000 bales sold per week – combined with a steady supply, increasing consumer demand and a competitive market with other commodities, should further boost wool prices.

“Cotton’s high price – (it’s) a potential substitute for wool – has continued to help wool’s competitiveness, as has the relatively low Aussie dollar,” Mr Dundon said.

“These unique market conditions have encouraged an increase in production with the wool clip 1.4pc larger in 2017-18 (for) a third successive year of growth, and the flock size now expected to hit 76.6 million sheep in 2018-19.

“With median average rainfall generally forecast across wool growing areas, and the EMI (Eastern Market Indicator) expected to remain above 1800c per kilogram clean for the year, Australia’s wool producers are set for another excellent year.

“This also appears to mark the beginning of a reversal of the 20-year trend of declining wool production in Australia,” Mr Dundon said.

But while Australia’s shorn wool production is expected to rise by 1.4pc in 2017-18 to 345,000 tonnes, the increase is expected to come from eastern states.

According to Rural Bank, WA is expected to record reduced yield per head in 2017-18 as a result of the drier seasonal conditions experienced compared to 2016-17.

But any impact on WA farm incomes from a reduced wool cut per sheep is expected to be offset by higher wool prices and more sheep shorn.

Rural Bank, the only Australian-owned dedicated agribusiness bank, is a wholly-owned subsidiary of Bendigo and Adelaide Bank Ltd.

Ag Answers provides research and analysis into commodities, farmland values, farm business performance and topical agricultural issues.

Its Wool Annual Review is available online at ruralbank.com.au/wool.

The ABARES report forecast demand for superfine wool less than 19.5 micron to remain strong over the medium term to 2022-23, supported by income growth in major wool apparel-wearing regions like China and on the assumption wool “maintains its position as a premium natural fibre”.

The value of Australian wool exports is projected to increase to $5.1b in that time.

Australia’s wool export volume in 2018-19 is predicted to be up 2pc on the current year, the price up 4pc and total value up 7pc to $4.62b.

Wool remains Australia’s third most valuable agricultural commodity export, behind beef and veal combined and wheat, but has brighter prospects in 2018-19, according to ABARES.

The EMI price is projected to rise to about 1785c/kg by 2022-23, 5pc higher than ABARES’ forecast of a 1700c/kg average for 2018-19.

By 2022-23 this will drive wool production to around 456,000 tonnes, 8pc higher than the 424,000t estimated for the current financial year, but most of the projected increase in sheep numbers will be in meat breeds, according to ABARES.

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