By Andrew Woods | Source: AWC, WI, AWEX, RBA, Cotlook, IC
Apparel fibre prices (wool, polyester staple, acrylic, cotton and all their different variants) tend to follow similar cycles and trends, unless there is a particular factor pushing one of the fibres out of line with the others. As such, one gauge of the wool market is to model wool prices on major apparel fibre prices.
In Figure 1 the 21 MPG is shown from 1988 onwards (the monthly data is adjusted for seasonal price effects) along with the difference between a model of the 21 MPG and the actual 21 MPG. The difference is shown in percentage terms and varies quite widely. The model is not designed to tell us at what price level the 21 MPG will be at a specific future date. It is designed to provide an estimate of the risk present in the market that the 21 MPG will rise (upside risk) or fall (downside risk).
For example when the model to actual difference is greater than 20% (that is, the model is 20% higher than the actual 21 MPG) a strong signal is given that wool prices, at the worst, have a very small risk of falling and quite a good chance of rising.
Conversely when the model is some 15% to 20% below the actual 21 MPG, the signal is that the chances of substantial price rises are limited. The longer the model stays well below the 21 MPG, the greater the chance that wool prices will fall.
In recent months, rising wool prices and falling cotton prices have widened the gap between the model and the 21 MPG. This gap is in the 15% to 20% range, pointing to limited price rises in the second half of the season. If the gap continues around this level into 2014, then the risk for wool prices in the second half of 2014 will be definitely on the downside.
Forward wool markets, while illiquid, remain reasonably bullish for wool prices in early 2014. The question is, how bullish?. Price modelling for the 21 MPG indicates modest price rises in the second half of the season are most likely. If the model continues to be well below the actual 21 MPG after Christmas then the downside risk for lower wool prices in the second half of 2014 will increase.
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