By Andrew Woods | Source: AWTA, AWEX, ABARES, ICAC, ICS
Merino wool prices continue to fly through the commodity price storm that has hit various commodities such as oil, cotton and the metals hard. While cardings continue to take the lime light as the best performer of all, broad merino combing prices are also performing very well. This article looks at the fundamentals underpinning this performance.
Figure 1 shows a comparison of the volume (in millions of farm bales) of 21-23 micron wool (AWTA core test volumes) from 1995 to 2005, with the price ratio of the 22 MPG to cotton. In the 1990s the Australian clip produced 1.7-2 million bales of 21-23 micron wool. Production is now around 0.5 million bales. With the fall in Australian production the price ratio for the 22 MPG has risen from a round 2.5 to anywhere between 4.5 and 6.5.
While the trend line shows why the price ratio has doubled/tripled since the mid-1990s, production alone does not do much of a job now telling us if the price ratio should be 4.5 or 6.5. In technical terms the correlation between production and the price ratio during the past decade has been a negligible one.
In the way of models we need to change the model to reflect the changed circumstances of the wool industry. Figure 2 shows a model of the 22 MPG price ratio to cotton for the past decade, which uses the production data from the second half of Figure 1 and cotton stocks. These two factors can explain about two thirds (63% to be precise) of the 22 MPG price ratio to cotton. As Figure 2 shows the model is not perfect but it gives a fair idea of the likely price ratio.
Why is the price ratio of 22 MPG to cotton important? The wool market operates within a complex web of interrelated apparel fibre markets. The price ratio allows us to look at the price relativity of wool, in this case to cotton, which allows all those other factors that are pushing apparel fibre prices up and down to be allowed for.
The Australian production of 21-23 micron wool has fallen by 80% since the mid-1980s. This massive fall in supply has underpinned a big increase in the broad merino to cotton price ratio. Now that the supply of broad merino wool looks to have stabilised (droughts excepted) production levels alone do a poor job of explaining the wool to cotton price ratio. A combination of wool production and cotton stock levels explains two thirds of the broad merino to cotton price ratio of the past decade. This highlights that wool prices are a function of both wool production levels and what is happening in other apparel fibre markets.
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.
Mecardo will send you its latest market analysis outlook delivered to your Inbox as it's published. You will also receive one month Premium access for free.
You tell us what information you want to hear about, so you'll only be alerted to information that is relevant to you.Learn more about Mecardo Sign Up Now!