Brought to you by AG Concepts

Thursday, March 30, 2017

No fibre is an island

By Andrew Woods  |  Source: AWC, WI, AWEX, PCI Wood Mackenzie, RBA, ICS

Key points

  • Price information alone from the cotton and polyester staple markets can explain about two thirds of the 21 MPG in US dollar terms.
  • The link between cotton and polyester and the 21 MPG in Australian dollar terms is weaker, but the principle holds.

2017-03-30 Wool Fig 1

2017-03-30 Wool Fig 2

Last week Mecardo looked at apparel fibre price rankings as a guide to whether the 21 MPG was near or away from fair value. The logic underpinning this analysis is that wool prices reflect a combination of conditions specific to wool (such as stock levels and fresh shorn wool supplies) and the general price cycle of apparel fibres, with all other factors a distant second. This article takes the theory one step further.

The data from last weeks’ article was used to develop the US dollar model price shown in Figure 1. An average of the rolling 5 year price rank for cotton and polyester staple was first calculated. This rolling 5 year percentile for cotton and polyester was then applied to the 21 MPG. In effect the 21 MPG price was sent according to the cotton and polyester price rank. If the cotton and polyester price rank was high, then the model chooses a high 21 MPG.

If Figure 1 the 21 MPG in US dollar terms is shown from the mid-1980s onwards, along with the model price. As the model price is driven off the price ranks of cotton and polyester, it pays no attention to any condition of the wool market such as the Reserve Price Scheme, the subsequent high greasy stock levels and the liquidation rallies following the end of stockpiles in 1987-88 and 2002-03. Note how well the model price explains the behaviour of the actual 21 MPG. It does get out of line on occasions but the general price level and the key cycles are well catered for the model. Keep in mind this is the US dollar price which the supply chain tends to “think in” when planning. The good news is that in US dollar terms this simple model indicates the 21 MPG to be only slightly over valued, on current apparel fibre prices (as the article last week indicated).

What about in Australian dollar terms? Figure 2 repeats the exercise in Australian dollar terms. The link between the model and the actual 21 MPG is a somewhat looser as the exchange rate variations impact on the fibre price ranks in slightly different ways. While the link is looser, the principle holds that price information from the cotton and polyester staple markets explains about 70% of the 21 MPG in US dollar terms during the past 15 years and about 33% in Australian dollar terms.

What does this mean?

The simple price model which takes price information only from the cotton and polyester staple markets does a very good job in explaining the 21 MPG during the past three decades. It demonstrates the very close connection wool prices have with the wider apparel fibre markets, and how any consideration of wool prices needs to take into account what has been happening in these markets. No fibre is an island.

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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