By Andrew Woods, ICS | Source: PCI Fibres, RBA, AWEX, ICS
Fibre price ratios are often used as a way of estimating whether the wool market is high or low in relation to other fibres, and are also sometimes used as a measure of the effectiveness of wool marketing. This article takes a look at fibre price ratios for merino combing wools.
For price ratios to be of use, they must provide some information in addition to that provided by wool prices themselves. If they do not, then high prices will give us high price ratios and low prices will give us low price ratios, in which case the price ratio is not telling us much more than the wool price. Figure 1 compares the year-on-year change in the price for the median merino micron category (MMM) to the year-on-year change in the price ratio for the median merino wool price to a polyester staple price series. The data runs from 1982 through to 2015, some three decades.
During the past three decades a little over half (54%) of the year-to-year change in the price ratio is accounted for by the change in wool price. During the past decade, this correlation has increased markedly to 67%. It is a similar story for the relationship between wool and acrylic fibre prices. For cotton, however, the correlation is much weaker. This means it is not changes in wool prices driving change in the wool to cotton price ratio.
When it comes to wool and cotton prices you would have read or heard comments about a 3:1 price ratio. Figure 2 shows a price ratio of the median merino micron category to a cotton price series, from 1982 through 2015. From 1982 through to 2001 the 3:1 price ratio stands out as the norm, with the exception of the late 1980s wool price boom. The Australian Wool Corporation used the 3:1 price ratio as guide to “fair value” for wool during the 1980s, and the ratio is still used.
Figure 2 shows, though, that the market structure has changed. In 2002, after the liquidation of the official greasy wool stockpile in Australia, the merino combing wool price ratio to cotton changed dramatically, jumping up into the 5.5 to 7.5 range and basically staying there. The ratio did drop in 2011 but cotton was in the process of breaking a 150-year price record (established during the American civil war) at the time.
The wool to cotton price ratio is currently on par with levels of 2007-2008 and 2011-2012, at the high end of its range. Given that cotton continues to struggle under the weight of 80% stocks to consumption, the wool to cotton price ratio should be on the high side.
Fibre price ratios don’t tell you a whole lot more than wool prices do for wool and manmade fibres, so they are not very useful in judging value in the wool market. For wool to cotton price ratios, the situation is different as the ratio tends to be more stable. However, we never really know if it is going to be the cotton or wool price that changes and, in doing so, changes the price ratio. On the whole, simple wool price ratios to the major apparel fibres are not that useful at the grower level.
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