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Tuesday, March 20, 2018

How good is the EMI?

By Andrew Woods  |  Source: AWEX, ICS, Mecardo

Key points

  • While in Australian dollar terms the average bale value of wool sold is well into record levels, in US dollar terms it is tracking around the peak levels seen in 2011.
  • The AWEX EMI explains around 93% of the average bale value sold at auction during the past two decades.
  • The average merino micron price does a marginally better job at explaining the average bale value.

2018-03-20 Wool Fig 2-1

2018-03-20 Wool Fig 2-2

2018-03-20 Wool Fig 2-3

The AWEX Eastern Market Indicator (EMI) is designed to reflect the general price movement for the greasy wool market, which is a really a collection of linked raw wool markets such as the specialist fine wool categories, merino wool, mid-micron wool, carpet wool, combing wool, carding wool, carbonising types and so on. This article takes a look at the effectiveness of the EMI.

In Figure 1, the average gross price paid per bale sold at auction in Australia is shown as monthly averages from mid-1995 onwards in both Australian and US dollar terms. This is the average price for all wool sold at auction. The Australian dollar value is the one we (the sell side of the market) see and act on while the US dollar value is more representative of how the buy side of the market see things.

In Australian dollar terms the average price, after spending most of the twenty years to 2010 below $1000, lifted to around $1400-$1500 in 2011. It then weakened until 2015, and in 2016 broke the $1500 level, rising to around $2000 per bale in early 2018. The US dollar series shows how exchange rate movements have favoured the domestic Australian price. In US dollar terms the current gross bale value is close to the peak 2011 level.

So, given the average gross value as a rough benchmark for market movements (rough because the selection of wool sold varies through seasons and between seasons), how does the AWEX EMI stack up as a measure of value in the greasy wool market? Figure 2 compares the average gross value per bale and the EMI (monthly average) from 1995 through to March this year. The EMI does a surprisingly good job, accounting for about 93% of the average bale value.

Figure 3 compares the average bale value with the average merino micron price. The average merino micron price tracks the average merino micron (currently around 19 micron) and uses the AWEX MPGs to set a price to 0.1 micron. This means the average merino micron price is based on full length merino fleece prices, which accounts for around 60-70% of the gross sales of wool at auction. The average merino micron price does a marginally better job of explaining the average bale value.

What does this mean?

The EMI, based on a constant basket of wool types, does a good job at explaining the average bale value of wool sold at auction in Australia. For growers looking for a quick and ready measure of the overall market the EMI does a good job. When it comes to looking at basis risk for a more specific category, typically a micron category but this also applies to short staple length wool and wool with high vegetable fault, a more specific wool price which fits the specification under study is required.

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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