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Tuesday, September 19, 2017

Beer, shearing and wool prices.

By Andrew Woods  |  Source: ABS, FWC, SBTM, AWC,WI, AWEX, NSW DPI, Complan, ICS

Key points

  • Shearing rates have not kept pace with beer prices during the past three decades.
  • The beer market has become more complex, so the comparison does depend on what type of beer is consumed.
  • Since the early 1990s the full cost of shearing a sheep has ranged from 40% to 70% of the value of a clean kg of average merino micron wool.

2017-09-19 Wool Fig 1

2017-09-19 Wool Fig 2

A Mecardo reader asked recently about comparing beer prices and shearing rates over time. As always Mecardo is happy to look at analysis from a fresh perspective, so this article compares beer, shearing and wool prices.

The wool industry, at various times, has spent considerable resources on looking at alternatives to shearing. For all this work, it surprisingly takes some effort to put a time series of shearing costs together. The library at the Fair Work Commission was most helpful in digging out old pastoral awards.

For beer, historic data is more easily available due to the work of the Australian Bureau of Statistics, with a beer index going back to 1972. However “beers ain’t  beers”. The ABS index relates to 285 ml (middy) of draught beer from a public bar. In the early 1970s this was a straight forward proposition. In the past decade with the advent of craft beers has become quite a mixed market with a wide range of prices. So for those readers who think the following beer index does not reflect your experience, please keep this in mind.

Figure 1 shows the ABS beer index rebased to 1987, and an index of the shearing rate for flock sheep (with a few holes in the data series filled) also starting at 1987. As one correspondent stated a schooner of beer in the early 1970s was 22 cents which was the same rate for shearing a sheep. In Figure 1 the beer index has risen faster than the shearing index. The beer index is based on full strength beer. A light beer price index would be closer to the shearing index. So, anyone who felt the shearing rate had slipped in terms of beer purchasing power is correct.

Superficially the next logical step would be to compare the shearing and beer indices to a wool price index. The question is, where do you start? At the 1988 high or in the early 1990s lows? On more consideration comparing a commodity price index (which is inherently volatile) to a retail prices index (beer) and a wage index (shearing) is not mixing like for like.

Instead, Figure 2 looks at the ratio of an estimated full sheep shearing cost to the average merino micron price from 1987 onwards. The estimated full shearing cost was the shearing award rate multiplied by 2.35. The factor of 2.35 looked about right when estimates of a full shearing cost from NSW DPI farm budgets and from Complan (published in the 1980s) were compared to the award rate. In Figure 2 the ratio effectively shows the cost of shearing a sheep to the price of a kilogram of clean merino wool. The wool price is the average merino micron price, so it reflects the change in the merino clip through time.

In the late 1980s the cost of shearing in relation to wool prices fell to very low levels (20-30% of a kg of wool). Since the early 1990s the cost of shearing has ranged from 40% of a kg of clean wool up to 70%. Shearing reaches the high ratios when the wool price is in a major cyclical low. In recent years, shearing has fallen to around 40%, reflecting the strong wool market.

What does this mean?

Shearing rates have lagged behind beer prices during the past few decades, which matches the general downward (relative) pressure on wages seen in the economy. The beer purchasing power for shearers has weakened.  In relation to merino wool prices, the full cost of shearing is currently at the low end of its range seen since the early 1990s. This is a function of high wool prices pushing the ratio down.

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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