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Wednesday, December 02, 2015

How is the wool market outlook faring?

By Andrew Woods, ICS  |  Source: AWEX, RBA, ICS

Key points

  • Minimal downside risk for merino combing prices seen this spring is likely to continue during the second half of the season.
  • The combing carding basis remains at low historic levels, so combing prices can only fall by compressing this basis further.
  • The upside for the market remains limited because of weak apparel fibre prices generally.
  • Any strong rally in the second half of the season is likely to be limited to a rise of 10-15%.

2015-12-02 Wool Outlook Review FIG 1

2015-12-02 Wool Outlook Review FIG 2

In August, as the wool market started up again after the mid-year recess, Mecardo reviewed the outlook for merino combing wool prices in the coming season. So with the first half of the season nearly over, how accurate was the August outlook?

The view in August was tempered by the main apparel fibres either reaching or being near four-year lows (in US dollar terms). Five year price percentiles for the main apparel fibres were (and still are) in the bottom decile. As such, any rally in the merino wool market was expected to be restricted, with a rise in the order of 15% the maximum that could be expected while ever the main apparel fibre prices remained at low levels. In other words, merino combing wool prices could rise on their own supply/demand factors, but only so far.

Prices immediately after the recess in fact did rally strongly by 8-10%. The rally was short lived, with prices back to where they started by the end of August. Figure 1 shows the 19.5 MPG in both US$ and A$ terms from 2010 onwards. A thin vertical line denotes the start of wool sales after the mid-year recess in 2015. You can see the short lived rally that occurs right next to the vertical line.

A second factor mentioned in August was the narrow combing to carding basis (difference in price). This factor was seen as supportive for merino combing prices and underpinned the call that there was only a small downside risk in the upcoming season. Figure 2 shows the 20 MPG basis to the Merino Cardings (MC) indicator from 2010 onwards.

On this call, Mecardo was partially correct. While prices did weaken from September into October by around a dollar, they rebounded fairly quickly and have spent the past five weeks slightly above the opening August prices.

Why the dollar dip? Seasonally weak prices in the spring are generally expected so the timing was normal. Figure 2 tells us the story. The combing carding basis shrank to levels below even the extraordinary early 1990s market when wool stockpiles crushed prices. The 20 MPG to MC basis fell from around 300 cents in August to 173 cents in early October. Meanwhile the MC sailed along unperturbed, with a little weakness in early October. The dollar fall in the merino combing prices was made possible by the contraction in the combing to carding basis to extraordinary levels by the standards of the past 30 years.

Where does that leave us now? The view is effectively unchanged, which is not unexpected as it is only four months down the track. Downside for the merino combing wools looks to be minimal with the combing to carding basis at very skinny levels. Upside for the merino combing prices continues to be constrained by weak apparel fibre prices generally, with a rally of 10-15% in the second half of the season probably the best outcome. Mind you, that would take prices back to or above their peak levels of last June. 

What does this mean?

The minimal downside risk means that short term hedging should probably be limited to minimum price contracts, if you are worried about price risk.  Any rally in the second half of the season in the order of 10-15% should be used as an opportunity to sell wool on hand and carry out some hedging for next spring.

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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