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Wednesday, June 15, 2016

19 to 21 MPG reviewed

By Andrew Woods  |  Source: AWEX, ICS

Key points

  • In comparison with the past five years the current 19 to 21 MPG premium is trading at a good level.
  • When the analysis is extended to 10 years, the current 19 to 21 MPG is at a low level, with a far greater upside than downside.
  • Analysis of the 17 to 21 MPG premium for the past decade shows a similar result, with the current 17 MPG premium trading at only its 14th percentile.

2016-06-16 Wool Fig 1

2016-06-15 Wool Fig 2

2016-06-16 Wool Fig 3

Mecardo examined the 19 to 21 MPG premium a year ago and more recently in a blog article looking a ways of setting forward orders to maximise access to market opportunities. The recent lift in the 19 to 21 MPG premium to around 90 cents combined with the increased bidding volumes for 19 micron contracts has stimulated grower interest in using 19 micron contracts. In this article we put the 19 to 21 MPG in a longer term perspective that takes into account the bigger supply cycles.

Over supply has been a feature of the fine wool market in recent years as the AWTA data has shown. With oversupply came smaller price premiums. Fine wool premiums have traded at extraordinarily low levels for the longest extended period since the late 1970s in recent years.  The Mecardo blog article ‘How to use "one cancels other" wool orders’ has recently shown price charts for the 19 to 21 MPG premium, showing the poor performance of recent years. The blog article also shows that the 19 to 21 MPG premium in recent years has a seasonal pattern of reaching a minimum in the middle of the calendar year, when interest in the fine wool market tends to be limited.

Following the fine wool boom of the late 1990s, price premiums fell to lower levels in the following decade. In the April 2015 article ‘Which forward contract should I use to hedge my wool?’ price charts showed the premium from the early 1990s onwards. The conclusion a year ago was that the downside in the 19 to 21 MPG was minimal with more upside risk than downside. The outcome has been that the premium has traded for 20% of the past year at lower levels than in April 2015 and higher for 50% of the time.

The 19 MPG premium to the 21 MPG has lifted to good levels by the standards of the past five years, so is it presenting good value? Table 1 shows the decile breakup of the 19 to 21 MPG premium for the past five years, the current (as of last week) premium and its rank. At 83 cents the 19 MPG premium is trading at a respectable 73rd percentile for the past five years.

Table 2 extends the analysis of Table 1 out to 10 years. The 83 cents premium drops away to a ranking of 36%, which means that the 19 to 21 MPG premiums has traded at lower levels for 36% of the past decade, and at higher levels for 64% of the decade. Using the longer time frame shows the current premium as nothing to get too excited about.

Table 3 shows a similar 10 year analysis for the 17 to 21 MPG premium. Its current levels of 147 cents is ranked at a low 14%, confirming the general view in the industry that fine wool premiums are very low.

What does this mean?

The conclusion reached a year ago that the 19 to 21 MPG was not trading at attractive levels still stands. Recent Mecardo analysis showing the tendency for the 19 to 21 MPG to reach a low point in the middle of the calendar year adds a timing factor to this view (this is not a good time of the year to fix the 19 to 21 MPG premium.) Where available the 21 micron based contracts still represent the better hedging value for fine wool.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 


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