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Tuesday, June 16, 2015

The key to the wool market in the short term

By Andrew Woods, ICS  |  Source: AWEX, RBA

Key points

  • Historically, carding prices have steadied after large price changes for 4-6 months, before changing again.
  • Combing wool prices face some downside risk at present (100-150¢), but this is limited while carding prices remain high.
  • Assuming carding prices hold most of their recent price rise well into the spring, this implies that merino combing wool prices will hold most of their recent price rises also.

2015-06-16 Wool Price Outlook FIG 1

2015-06-16 Wool Price Outlook FIG 2

Wool prices have risen strongly since March, in the order of 300¢/kg clean. Auction prices for combing wool eased slightly last week, signalling that the rally has probably run its course. The key question for many farmers is, “What is the risk to wool prices for the coming spring?”. This article takes a look at the prospects for wool prices in the first half of the new (2015-16) season.

While merino combing prices eased last week, crossbred and cardings prices were firm to higher. In April, we looked at what information carding prices can tell us. With the rise in combing prices in recent months, the gap between combing and cardings prices has widened from the extremely low levels of the autumn.

This leaves some room for combing wool prices to ease in relation to carding prices (around 100¢ maximum) before carding prices start to support combing prices again.

This raises the question of what are carding prices going to do. History shows us that carding prices rarely turn around after a strong rally and retrace the previous rise. Figure 1 shows the Merino Cardings (MC) in Australian cents per kg from 1991 onwards.

The only example of prices rising strongly and then immediately reversing the rise is in early 2002. Generally, the MC trades for up to six months at the new higher price level following the rise (albeit sometimes with a minor retracement of the rise), before changing price levels once more.

Figure 2 shows the MC from 1991 onwards in US dollar terms. In 2011, the previous major high in US dollar terms, the MC spent four months trading near its upper price level before starting to trend downwards.

Four to six months looks to be a common period for the MC to range trade after a big change in price. Assuming the MC has reached the upper end of its rise in May (this shows up more clearly in US dollar terms), that points to carding prices hold at high levels until the August-October period. This in turn points to the merino combing prices retaining a lot of their recent rise for the same period, well into the spring. 

What does this mean?

While the gap between merino combing and carding prices has widened, the downside price risk for merino combing wool prices continues to be small (especially with the 21 MPG trading at 1400-1500¢) while the Merino Cardings indicator trades above 1000¢. Historical patterns suggest that the MC will hold a lot of its recent price rise into the spring. This means the downside risk for merino combing prices looks to be low until September/October.

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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