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Thursday, September 17, 2015

How do crossbred wool prices relate to merino cardings?

By Andrew Woods, ICS  |  Source: AWEX

Key points

  • Merino Cardings reached a cyclical low in 2008, and then steadily climbed.
  • Both carding and combing crossbred prices have followed a similar pattern.
  • The finer crossbred cardings price follows the Merino Cardings indicator very closely.
  • As for merino combing prices, the rise seen in crossbred prices during the past year can basically be put down to the lower exchange rate.

2015-09-17 MC And XB Prices FIG 1

2015-09-17 MC And XB Prices FIG 2

2015-09-17 MC And XB Prices FIG 3

Earlier this week we looked at the change in merino discounts for pieces, low staple strength and cardings over the past twenty years. The other star wool category at present is crossbred wool, with prices at or close to nominal all-time highs in Australian dollar terms, and very high in US dollar terms. This article compares the rise of crossbred wool and merino cardings.

Figure 1 shows the Merino Cardings price series from 1999 onwards, along with a series for 24 micron crossbred lambs wool of 60 mm in length. Since 2004, the two series have moved closely in line, with the 24 micron crossbred lambs price very close to the Merino Cardings indicator. That said, the two series occasionally get out of line. As with merino combing fleece and cardings, when merino cardings are cheap in relation to the crossbred lambs price, it tends to flag limited upside or price weakness for the crossbred lambs wool. Conversely, when merino cardings are expensive, it flags strength for crossbred lambs wool prices.

Figure 2 is similar to figure 1, except that 26 micron crossbred lambs wool price is shown. While the price link is weaker, the 26 micron crossbred lambs price has followed the same basic trend of the past decade. Moreover, it is trading at extraordinary price levels ($1200 for a bale of 26 micron crossbred lambs wool).

Figure 3 shows the comparison between merino cardings and a 28 micron 100 mm long crossbred fleece price series. The relationship between the two series becomes looser again, with the merino cardings changing from trading at a discount to the crossbred fleece price around 2006-7 to a premium.

You can see the two series are related, but they are not close siblings like the 24 micron crossbred lambs and merino cardings prices (in figure 1). Merino cardings and 28 micron crossbred fleece prices are more like first cousins. A low basis (price spread) between the two series tends to flag strength for the crossbred price, and a high basis tends to flag weakness for the crossbred price. However, this spread is not as reliable an indicator as it is for merino prices.

What does this mean?

While our analysis is basic, the close correlation between the Merino Cardings and crossbred lambs prices indicates they are closely related, with high prices for both coming from similar demand. The link between merino cardings and crossbred combing prices is weaker, with merino cardings prices changing from trading at discounts about a decade ago to trading at premiums to crossbred combing wool. The weaker correlation between prices indicates that the demand driving crossbred fleece prices is from a different source.

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