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Good afternoon and thank you for coming along to
the second-last session.
I know it gets a little long towards this point in
the conference.
I have two commodities to cover today so I fairly
have to skip along.
And what I'm looking to do today is to present a
first off some of the economic factors that are
common to both industries in this year's outlook and
then to follow that with a bit of detailed discussion
on each fibre to draw attention to the supply
side and where ABARES sees the industry is going
over the medium term.
So first I'll start with those common elements.
On the demand side weak economic growth in the E.U.
and the U.S.A. which started in the second half of 2011
affected consumer confidence and retail sales.
In the E.U., the fall in demand conditions was
brought on by the European sovereign debt crisis from
which the region is still trying to recover.
And the U.S. economic recovery while underway is
still struggling a bit as high unemployment keeps
consumer spending at bay.
Now the outlook for growth in both those countries is
pretty modest between 2.4% and 2.5%.
And the economic uncertainty that continues
in the European countries will still add another
layer of uncertainty to this year's wool forecast.
Now the impact of this is that as major markets for
imported clothing the demand for wool and for
cotton products is expected to remain
somewhat muted over the medium term.
Now turning to China which is the principal export
market for both fibres, economic growth is
expected to be lower than it has been in the past
couple of years but to a steady at about 8% through
the projection period.
However, the expectations for personal income growth
in China will sustain retail demand.
And that will support the demand for Australian fibres.
And that's very important because China is a key
market for our industries.
And as for the exchange rate although it is
expected to depreciate slightly over the medium
term it is also expected to remain relatively high.
And when you have a high exchange rate it means
that the cost of our products remains quite a
bit higher than it used to be and that will put
downward pressure on prices over the medium term.
So those are some of the common demand elements and
now let's turn to the supply side.
We've had good seasonal conditions over the past
couple of years and that has, (a), provided an ample
supply of irrigation water for our cotton growers and
excellent pasture growth for sheep growers.
Production of wool is expected to increase
through the medium term and production of cotton,
while it is expected to fall in the short term,
it is expected to remain favourable when compared
to the five years up to 2008-9.
Stocks, given the expectations about
production over the medium term combined with that
demand profile I just described,
we expect stocks of both fibres to increase over
the projection period.
And when you put supply and demand together it
allows us to formulate some ideas about prices
going over the next five years.
And the price schedule for both fibres is basically
the same.
In the short term we see prices falling
considerably over where they are,
well this year for wool and last year for cotton
but to remain--over the projection period--
relatively stable and on average certainly higher
than they have been in the five years up to 2008-9.
So in a nutshell that's my entire presentation
because really the outlook is so common to both these fibres.
But I'm now going to talk about some of the
specifics relating to each industry and I'll start
with wool.
Of course this is not a wool chart but this speaks
to wool production.
That's why I'm starting here.
Now this is a graph obviously for sheep meat
prices and the size of the flock.
And what I want to point out here is the steep
increase in sheep meat prices starting at about 2008-9.
And that came from strong demand from the Middle
East compounded by the drop in available supplies
from Australia and even New Zealand and it
provided a strong impetus for growers to increase
the size of the flock.
Now until two years ago the national flock had
been steadily decreasing for about 15 years and hit
a low of about 68 million head.
But now it's been steadily increasing over the past
years and we expect that to continue albeit it at a
decreasing rate out over the medium term.
Now the impetus for growth of the flock was further
supported on the wool side when prices really started
to take off about a year to a year-and-a-half ago
as I've depicted here.
And the reason was the strong recovery from the
global financial crisis in the E.U. and the U.S.A.
And so there was strong demand coming from that
front while at the same time there was a low
global supply of wool by the principal apparel wool
exporting countries like Argentina,
Uruguay, New Zealand and South Africa.
However with the new economic,
I'll say new but whatever, the new economic
uncertainties that have started in the second half
of 2011, prices for wool began to fall in July and
they have fallen about 15% since that time.
Now despite the decline we don't expect prices to
fall much more for the rest of the year because
of the low stocks that Australia is thought to
have at this time, at least the assessment by
our analyst is such.
And we expect prices to finish about 4% higher
than where they were last year.
So having said that about the short term,
I'll just move now to the flock expansion and dig
down a bit deeper in that regard.
Up to the end of June 2011,
the size of the flock increased about
74.3 million head and it's expected to increase
another 6% by the end of this financial year.
Now the current growth, obviously as I said before
reflects producers expectations on the
continuing strong prices for sheep meat and it's
been aided by favourable seasonal conditions over
the past couple of years.
Now over the medium term, the flock expansion is
expected to be achieved by increasing the number of
wethers in the flock.
And that is the dark blue section represented here
in the components of the flock.
And the reason is because of the great sell off in
wethers in the mid 2000's when the price of wool was
very low.
And so when we bring those wethers,
the number of wethers up what that's going to do is
increase the average cut per head and that will
assist in the increase in wool production given the
increasing size of the flock overall.
Now as to where the increase in the flock is
happening I looked to ABARES surveys analysis,
our Australian Agricultural and Grazing
Industry Surveys, what we call the AAGIS survey and
perhaps some of you here have participated in that
in the past.
Preliminary data from ABARES AAGIS survey which
covers about 90% of the sheep in the broadacre
sector has shown that there's been considerable
growth in the pastoral zone,
the wheat-sheep zone and in the high-rainfall zone
over the past two years.
Two years ago the rate of growth nationally was
about 6%.
Last year it's estimated to be about 12%.
And the zone that is of the most significant is
the wheat-sheep zone which represents about 56% of
the national flock and which last year had about
12% growth in the flock in that region.
Now an expected increase in merino sheep for wool
production in that zone is expected to lead to a
higher producer of medium and strong wools.
And that is wools between 19.6 microns and 24.5 microns.
And what that means in terms of the components of
the wool clip as I've depicted here,
where you have fine wools on the bottom,
the medium and broader wools in the middle and
the coarser wools represented by the red bar.
With the greater instance of cross-bred sheep to
meet the demand for sheep meat,
we are expecting that area of blue to expand.
And you can see that by the orange circle that
I've put up here.
Now of course the micron distribution in the wool
clip will also depend on seasonal conditions
because the above-average seasonal conditions in
many wool growing regions over the past two years
has actually resulted in a slightly stronger wool
profile than in the two years up to 2009-10.
So producers' decisions be given the strong prices on
both the meat side and the wool side combined with
Mother Nature is what's going to be affecting that
navy blue section in the graph.
So that's just a profile of where the forecast
increase and wool production is coming from.
What I'm going to do now is just turn that around
and to show you what those sorts of factors mean for
ABARES production forecast and price forecast.