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Monday, June 27, 2016

A primer on clip basis

By Andrew Woods  |  Source: AWEX, Wool Analysis Centre, ICS

Key points

  • The clip basis (average price as a proportion of the average point of micron MPG) for a 19.3 micron clip (19.5 micron fleece) has increased by around 5% during the past 20 years.
  • Part of the increase in basis is from the rise in relative values of non-fleece components of the clip.
  • Most of the rise in basis stems from the flattening of the micron premiums and discounts.
  • Fleece values account for 77-79% of the average value compared to 78-80% 20 years ago.

2016-06-27 WOOLS - BASIS A PRIMER FIG 2

2016-06-27 WOOLS - BASIS A PRIMER FIG 3

2016-06-27 WOOLS - BASIS A PRIMER FIG 4

 

This article takes a more detailed look at the components of a clip and how they contribute to the gross value of the clip. From this base we look at the effect of different fleece piece ratios have on the final value of the clip.

In the article “Merino clip basis” the average combing merino specifications for the past year were used as a base for calculating price deciles. For the sake of simplicity the price and fibre diameter of the clip was focussed on the fleece fibre diameter of 19.5 micron. In this article we will go into more depth and detail about clip basis.

In Table 1 the fibre diameter of the various components of a clip are given along with their fibre diameter and the base level proportion on a clean basis. The first thing to notice is that the 25% of the clip which is not fleece is finer than the fleece and pulls the average fibre diameter 0.2 micron finer than the fleece fibre diameter. In the market of recent years this change in fibre diameter has made little difference to the price realised.

During the past two decades the relative value of cardings, pieces and bellies have risen in relation to fleece values. Figure 1 shows the four clip component prices expressed as a proportion of the 19.3 MPG by calendar year from 1996 onwards. The rise in relative carding values shows up nicely in the merino locks basis which rises from around 30% in the late 1990s to nearly 80% currently. This has helped lift the pieces basis from around 85% to around 92-3% with bellies rising similarly.

The fine wool boom of 1999-2001 shows up in Figure 1. This is where the pieces and bellies rose above the fleece price. The high fine wool micron premiums at the time were responsible for the finer pieces and bellies prices exceeding the broader fleece price. Note that the piece and fleece basis came together again in 2011, the last time that fine wool premiums have been at high levels.

So, how has the increase in relative value for the non-fleece components of the clip affected the overall clip basis? The weighted clip basis is shown Figure 1 and the answer is that it has risen from around 90-91% to 96-97% of the MPG during the past 20 years. The proportion of clip value provided by locks has risen by around 1% (which is a very credible effort for a mere 3% of the clip.) However for the proportion of value provided by pieces and bellies has been reasonably stable (around 20%). It seems the flattening of the micron premiums and discounts after 1999-2001 has counteracted the increase in relative value of non-fleece combing wool prices. The increase in clip basis seems to stem mainly from the flattening of micron premiums and discounts, so the broader fleece component has a higher basis to the slightly finer MPG.

Figure 2 shows the proportion of the average clip price attributable to each component during the past 20 years. The fleece component has contributed between 76.5% and 79% of the average clip price.

Finally Figure 3 shows a simple analysis of the effect on the whole clip basis by varying levels of fleece packaged for sale. (Note the underlying assumption in this analysis is that the AWEX Code of Practice is adhered to.) The average proportion of fleece (weaners and adults) of merino wool sold at auction is 75%. There are gains (in the order of 0.5% to 1%) to be made by packaging as much wool as fleece as possible.

What does this mean?

A whole clip basis (average clip price expressed as a proportion of the relevant indicator) varies with time and market cycles. A basis that was suitable (for example assuming a clip value to be 95% of the 19.5 MPG) five of ten years ago probably needs refreshing, especially if used for budgeting purposes.  Careful packaging of wool for sale still has the potential to add 0.5% to 1% to the gross value of clips, a handy addition to the budget which is repeatable.

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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