By Andrew Woods | Source: AWEX, ICS
The 21 MPG has picked up since the early spring in 2013. However, a strong lift in price early in the calendar year is proving elusive. What does 2014 have in store for price rises and risk? This article uses a price model to take a look at this.
Firstly, the usual caveat about models being simplistic representations of a complex real world needs to be made. This model uses a mix of factors to explain the level of the 21 MPG including cotton prices, wool stocks and temperature data. When the 21 MPG is cheaper than the model it points to the strong potential for price rises and when the 21 MPG is well above the model price (as it is currently) it points to weaker wool prices.
Figure 1 shows the 21 MPG from 2006 onwards, along with some projected price levels for the coming year put into price rankings. The projections are split into a 0% to 25% band (the lowest 25% of price projections), 26% to 50% band (which is the next higher 25% group of prices) and a 51% to 75% band (which is the next higher quartile of projected prices).
The projected bands between 26% and 75% tell quite a promising story, ranging roughly between 1150 and 1250¢/kg clean for the coming year. Here, the model is saying there is a 50% chance of the 21 MPG trading in this range. On the downside, there is a 25% chance of prices trading at lower prices down to around 1000¢/kg clean next spring. There is also a 25% chance of prices trading above the 1150-1250 ¢/kg band.
What could upset the model projections? Significantly lower cotton prices would certainly pull the model projections lower, with the converse also applying – higher cotton prices would help push the model upwards.
Wool prices for the coming year are likely to ease, once the early season strength has passed. At this stage, the downside for the market looks to be limited with a 25% chance of the 21 MPG trading well below 1150¢/kg clean. Any major deterioration on the cotton market would see the projected wool prices fall, indicating increased risk of lower prices.
Given current market and forward price levels, growers with wool to sell this calendar year should consider taking cover now for a percentage of their production.
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