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Wednesday, June 25, 2014

Seasonal patterns in wool supply and price – what connection?

By Andrew Woods  |  Source: AWEX, RBA, ICS

Key points

  • Seasonal patterns of the median merino price and merino supply of recent years weakly correlated.
  • The seasonal pattern in price tends to fall from autumn through to early spring when the seasonal pattern in supply is either falling or low.
  • The seasonal pattern in price rises during the period of peak supply.
  • Adjustment for exchange rates helps to smooth out the seasonal pattern in price.

2014-06-23 Seasonal Patterns In Supply And Price FIG 1

2014-06-23 Seasonal Patterns In Supply And Price FIG 2

Seasonal patterns are familiar to farmers: work patterns through the year are determined by them. Therefore, we are familiar with seasonal patterns in the supply of wool and also know that there are seasonal patterns in the price of wool. This article looks at the connection between the two.

Figure 1 shows the monthly seasonal effect on price for the median merino micron category (currently around 19 micron) for the past five years (left hand axis). Prices are positively affected early in the calendar year, after which they ease to the spring and then start to pick up late in the calendar year.

Figure 1 also shows the seasonal pattern in merino wool sales for the past five years (right hand axis). Minimum volumes are sold in the middle of the calendar year, with maximum volumes in the spring, followed by early in the calendar year.

Figure 2 shows the same series as in figure 1, with the difference that the price series has been adjusted by the Australian trade weighted index as a way of reducing the effect of currency on the price we see in Australia. This adjustment smooths out the seasonal pattern and more clearly defines the early spring low in price.

The correlation between the two seasonal patterns across the year is low enough not to be statistically important. However, a close look at the two patterns shows some interesting features. The seasonal price pattern falls from early in the calendar year through to early in the spring, at the same time that volume falls.

The default assumption by many in the industry would be that falling volumes would lift prices, but the experience of the past five years tells another story. The story has been that the seasonal pattern in price falls from early in the calendar year as supply falls. It reaches a low point as the spring flush in supply begins, after which prices start lifting (from a low base) during the high supply time of the season.

What does this mean?

Do not assume that periods of high supply during the season will experience low prices for the season. The seasonal pattern in price tends to reach a low early in the wool selling season, before peak supply arrives. A combination of processing cycles, and the desire to buy when plenty of wool is available, results in seasonal prices improving through the spring.

This is less clear in Australian dollar terms (for farmers selling wool) and more sharply defined in exchange rate adjusted terms (for overseas mills buying wool). Periods of falling or low supply appear to correspond with periods of falling seasonal prices, which makes sense as it is more difficult to put together consignments in periods of small volumes. 

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