By Andrew Woods | Source: AWC, WI, AWEX, RBA, ICS
The 28 MPG is up by nearly two dollars on its February low. The old days of low volatility crossbred prices looks to be a thing of the past. This article takes a look at the 28 micron category.
Figure 1 shows the 28 MPG (which represents the biggest Australian crossbred category by volume) from 2008 onwards in Australian and US dollar terms. The patterns are similar in both currencies, although current price levels in Australian dollar terms are higher historically than in US dollar terms. In US dollar terms the 28 MPG is working its way back up to around US750 cents (it is currently around US700 cents) which has been its upper limit since 2011.
In Figure 1, the 28 MPG tended to find a level and then trade around this level up until 2014. Since 2014 the 28 MPG has exhibited a tendency to trade more like merino prices, that is, trending up and down with a higher level of volatility.
Figure 2 shows the 28 MPG ratio to the 21 MPG from 1983 onwards. Traditionally, the ratio reaches low levels when merino prices are high and high levels when merino prices are low. The effect of the high merino greasy stock levels in the 1990s, a result of the failed reserve price scheme (RPS), shows up clearly with the 28 MPG ratio elevated. Merino prices were pushed down by the high stocks levels and were cheaper in relation to crossbred prices.
In February the 28 MPG ratio to the 21 MPG fell to a level not seen since February 1991, at the re-start of auctions following the failure of the RPS. The 28 MPG fell to 0.4 of the 21 MPG, meaning it was dirt cheap in relation to merino prices. The likelihood in February was that in the coming months the ratio would start to narrow. The key unknown then was whether the 21 MPG would hold its value or ease. Time has shown the 21 MPG has held its value, so the way for the 28 MPG to 21 MPG ratio to narrow was only by the 28 MPG rising, which it has done so spectacularly.
While the ratio has narrowed the 28 MPG is still only 0.48 of the 21 MPG, which is reasonably low. Given this, where to now? The 28 MPG price ratio to the 21 MPG does have something of a seasonal pattern. Figure 3 shows the seasonal pattern of the past decade for the volume and price ratio of the 28 to 21 micron category. The 28 MPG tends to reach its low point compared to the 21 MPG early in the new calendar year when the volume of 28 micron combing wool is high compared to the volume of 21 micron combing wool. The seasonal pattern suggests the price ratio will continue to narrow through to early in the new season.
The continued strength of the merino market looks to have dragged the 28 MPG higher quite quickly after it reached a 27 year low point in its price relativity in February. There is some further room for the basis to narrow, and time for this to happen as the seasonal pattern remains favourable until around August/September. The main block to further rises in the 28 MPG is its resistance level around US750 of the past seven years, some 7-8% higher than current levels.
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