On Diverging Paths: Merinos & Their Wool

The Australian Merino has long been bred for the range of income opportunities it presents to farmers, with the divergent paths for wool prices and livestock prices in 2020 bringing this into sharp focus. While not unfamiliar to volatility, the onset of the Covid-19 pandemic and associated economic uncertainty contributed to the wool market slumping to its lowest levels since October 2012. Highlighting their versatility, while wool retreated, the demand for Merinos stayed strong with improved seasonal conditions and fierce restocker demand underpinning historically high sheep prices.

Looking at historical Eastern Market Indicator (EMI) average prices between 2005 and 2020, the wool market has been on a steady upward trajectory. As shown in figure 1, 2020 has seen the market decline sharply, to prices last seen in 2012 as overseas markets shut down due to the Covid-19 pandemic. The Australian wool market heavily relies on strong global economic growth and as key purchasing markets halted their operations during the Covid-19 pandemic, the industry felt the full brunt of the decreased demand on prices.

The AuctionsPlus Market Insights team (AMI) has collated monthly average EMI prices against the online monthly average prices for Merinos in three categories; 30-45kg wethers and 45-55kg wethers, and young breeding articles aged 2-4 years. In figure 2, January and February saw the wool market remain firm at 1578c and 1575c/kg clean, as the full extent of the severity of the Covid-19 pandemic was still yet to influence purchasing behaviour. Likewise, during this time young Merino breeders began their climb, as much needed rain fell across the eastern states of the country and restockers bounced back into the market. Average prices for young Merino ewes jumped from $179/head in January to a peak of $267/head in May.

Similarly, prices increased for Merino wethers due to above average rainfall, although at a steadier rate than the young ewes. As shown in figure 2, the overall Merino market for the nominated weight categories experienced price rises, until June, where the market fell in value for the following three months. Interestingly, the wool market followed a similar downward trajectory in this period, although this placed the wool market at a 10-year-low, whereas the Merino market corrected from an all-time high. Since August, the wool market has regained 200c, with wether categories following closely as restocker demand steadies. Young Merino ewes also followed this trend, although prices remained strong, up $54 on January, closing out November $37 down on May’s peak.

The volatility experienced in the wool market this year has provided various options for Merino producers, as demand exists for sheep both in and out of their fleeces, with the price gap narrowing between the two. Previously, 2018 saw young Merino breeders with 70-100mm skins on their backs averaging $234, while other categories made up to $89 less or 39% lower.

This significant price difference between 70-100mm skins and other unshorn categories was indicative of the wool market at the time, with the EMI sitting above 1780c/kg clean for the year of 2018 - with some months averaging over 2000c/kg clean, as shown in figure 4. Conversely, 2020 has seen this price gap narrow with ewes, with 70-100mm skins making $272 on average, while shorn young breeding articles sold to average $238/head, only a 14% difference.

The reduced price difference between shorn and unshorn ewes from 2018 to 2020 indicates the reduced influence the wool market has on the price of Merinos this year. The demand by producers in many parts of Australia on rebuilding their flocks has sustained and strengthened the price of Merinos, with seemingly little concern for the state of the current wool market.