Australian agriculture outlook 2024: Wool

From the field

“Stability could be the defining feature of the wool industry in 2024. Economic conditions for consumers are set to keep demand for wool constrained. Any price improvement will likely come from a small decline in production resulting from dry conditions. With prices set to remain below-average, wool growers will remain challenged by the high cost of shearing. Even as challenges remain, wool has come into greater focus for producers. The volatility in livestock markets has made sales into a relatively more stable and reliable wool market an important opportunity for cash flow.”

Jess Seaver, Agribusiness Relationship Manager – Mildura

Supply

Australian wool supply is expected to ease in the new year with fewer sheep shorn and lower cuts per head. Both of those factors are results of drier seasonal conditions in late-2023 and forecast over summer. The growth phase in the national sheep flock has come to an end following a recovery of 23 per cent from a low in 2020. The flock is set to contract from the current 78.8 million head following high turn-off in 2023. Sheep slaughter in the first three quarters of 2023 was higher than 2022 by 2.6 million head (+56.7 per cent). Lamb slaughter was up by 2.3 million head (+14.8 per cent). Turn-off of over five million head (including live shipments) far exceeded earlier forecasts. This suggests a contraction in the national flock is likely for 2024. This would naturally mean fewer sheep will be shorn in the new year. In addition, the forecast for dry conditions through to autumn would result in lighter average cuts. The Australian Wool Production Forecasting Committee’s August estimates placed average cuts per head down 2.2 per cent for the 2023/24 season. The combined impact of fewer sheep shorn, and lower wool cuts will lead to a moderate decline of around two per cent in Australian wool production in 2024. However, production will likely remain above the 10-year average on the back of improved production in the last three years.

Although indicators suggest wool production should have started to decline, actual wool supply to auctions has been trending in the opposite direction. The number of bales sold in the 2023/24 season-to-date has been 15.2 per cent higher year-on-year. This cannot be fully accounted for by carryover stocks from 2022/23 since production was only 3.8 per cent higher year-on-year for the season. It is more likely that shearing progress is ahead of last year’s wet weather affected spring. This reduced auction offerings significantly a year ago. In addition, the relatively larger declines in sheep and lamb prices have likely prompted increased wool sales for cash flow. Lower pass-in rates, despite lower prices, also indicates this willingness of producers to sell and take the prices on offer. Wool production and auction volumes are not always neatly correlated, however the disparity so far this season is noteworthy. For the 2023/24 season to finish with a lower volume of bales sold, the remainder of the season would need to see a significant decline in supply. A two per cent year-on-year decline in bales sold in 2023/24 would require an average of around 33,200 bales sold per week. This is 11.7 per cent below the weekly average for the season-to-date. As a result, wool supply at auctions is likely to trend lower across the first half of 2024.

Demand

The wait for a positive signal from retail demand for woollen products is expected to continue into the first half of 2024. Retail demand is expected to remain subdued due to economic challenges for consumers. This is set to continue constraining discretionary spending. However, economic conditions are beginning to turn in the US and Europe. In both markets inflation has begun to slow. Unfortunately, economic growth has also slowed. This makes the prospect of recession more likely, particularly in Europe. These factors make further interest rates rises unlikely and brings the prospect of rate cuts into focus. An improvement in demand for woollen products is unlikely in the near-term. However, the trajectory is shifting from the high-inflation and rising interest rate trends of recent years. In China, economic stimulus appears to have helped improve consumer confidence. October saw an encouraging rise in retail sales. Improved Chinese demand helped drive gains in wool prices during November. With 87 per cent of Australian wool exports going to China in 2023, the direction of Chinese demand will have a significant influence on overall demand for Australian wool. In general, the first half of 2024 will see wool markets still waiting for a broader improvement in economic conditions. This is a critical factor needed to reinvigorate consumer demand.

Price

There is little optimism for more than a modest improvement in Australian wool prices in the first half of 2024. Support for improved prices will only likely come from reduced supply. However, any improvement will be constrained from ongoing weakness in retail demand. This follows a very flat trend in the Eastern Market Indicator (EMI) for the season-to-date. The EMI has averaged 1,146c/kg in the 2023/24 season. This is 11.7 per cent lower year-on-year and 17.1 per cent below the five-year average. At this level, prices are below the COVID-impacted 2020/21 season and the lowest since 2014/15. Any improvement in prices in the new year is unlikely to be sufficient to lift the EMI back toward the five-year average of 1,382c/kg.

Prices trends have varied by micron in the season-to-date. Fine wools have seen a relatively larger decline with the season-to-date average for 18-micron wool down 18.3 per cent year-on-year. A smaller price decline has occurred for 20-micron wool, down only 4.6 per cent. That has seen the price differential between these microns close from 498c/kg in 2022/23 to 213c/kg this season. This is well below the five-year average differential of 375c/kg. November brought some encouraging improvements of around five per cent to fine and medium wools. Despite not seeing much of a decline in the season-to-date, crossbred wool prices remain incredibly low. On the surface, a decline of 2.4 per cent for 28-micron wool this season appears a better performance than fine and medium wools. However, sitting 38.5 per cent below the five-year average reveals the depths at which crossbred wool prices are stuck in. This compares to 18-micron at 17.8 per cent below average and 20-micron sitting 11.6 per cent below average.

Prices stagnating at below-average levels will also coincide with ongoing higher shearing costs. Availability of shearers could continue to slowly improve in the new year however costs are unlikely to ease. As a result, producers will continue to bear high expenses for shearing while receiving relatively poor prices, especially for broader microns.

Source: Australian Wool Exchange

Source: Australian Wool Exchange