By Andrew Woods, ICS | Source: AWEX, ICS
It is often commented that the wool supply chain likes wool prices to close on a firm note in the lead up to a recess in auctions, hoping this leads to confidence in prices and, through that, fresh business. This article takes a look at the relationship between price movements prior to, and following, Easter during the past decade.
Week to week price movements in the wool market have had no consistent correlation during the past decade. This means that a price rise, of say 3%, this week tells us little about what is going to happen next week in the market.
Figure 1 compares the change in price for the 19 MPG in the week before Easter, to the change in price in the week after the recess in auction sales. Both price changes use the same week as a base, which is the closing price two weeks before Easter.
This is different to comparing week to week changes, where the base keeps changing. The twelve years of data used show a strong positive correlation, reflecting the common base week. About two thirds of the price movement (calculated this way) in the week following the Easter recess (a one week recess since 2005) can be explained by the price movement in the week before Easter.
But importantly, for how long does this effect persist? The answer is, not long.
Figure 2 compares the price movement in the week before Easter with the price movement in the third week of sales after Easter. Again, the common base used for each year is the closing price for the 19 MPG two weeks before Easter. The correlation drops right away, with price movements in the week before Easter not telling us much about likely changes in price three weeks after Easter.
During the past decade, price movements in the week before Easter have given a solid insight into price changes likely in the week following Easter. Keep in mind that the average absolute price movements we are discussing range from 1.6% to 2.6%, so they are relatively small changes in the indicator. However the sign of price movements before Easter (whether they are positive or negative) can help guide where reserves should be set in the week after Easter.
The Easter price pattern of the past decade shows us that firm wool prices in the week leading up to Easter point to firm prices at sales in the week following Easter, when referring to prices two weeks before Easter. The statistical trap here is that, while weekly price movements from a common base (in this example 2 weeks before Easter) are correlated, the actual week to week changes are not. In weekly price movements using a common base, it is the correlation of prices rather than the price movements that is showing up. Beyond all these statistical considerations, these small movements in price then can be easily masked by changes in premiums and discounts for some other characteristic such as vegetable fault. However, a guide to the likely direction of prices does help in deciding where to set reserves in relation to valuations (assuming the valuations are somewhere near the mark).
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