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Wednesday, August 17, 2016

What’s driving broad merino prices?

By Andrew Woods  |  Source: AWEX, AWTA, PCI Wood MacKenzie, Cotlook, RBA, ICS

Key points

  • During the past 20 years supply can account for about two thirds of the rise in the 23 MPG.
  • The supply of 21-23 micron wool has fallen by 75% during the past 20 years.
  • The drop in supply explains the massive out performance of the 23 MPG in comparison to cotton and polyester staple prices.

Wool Fig 1

Wool Fig 2

Wool Fig 3

 

The 21 MPG is trading between 1400 and 1500 cents and the 23 MPG is bobbing along near all-time nominal highs, while most apparel fibres are trying to pull themselves up from five year lows, it is worth standing back and looking at the main driver of this impressive performance.

In July we looked at the relationship between change in supply and the relative prices of fine and broad merino wool. This article takes a longer view, of the past two decades. Figure 1 compares the supply (farm bales as measured by the AWTA) for 21 to 23 micron wool by year from the mid-1990s onwards with the annual average 23 MPG. As the volume has fallen from around 2 million bales (well in excess of the current entire Australian clip) the price has lifted. The supply of 21-23 micron wool has fallen by around 75% during the past 20 years to around 500,000 farm bales with the annual average price for the 23 MPG spending its time in the 1100-1200 cents range in recent years. From this perspective the current prices were hard won by sacrificing three quarter of production.

Wool prices do not operate in a vacuum; rather they are part of group of interlinked fibre markets. Figure 2 looks at the relative change in price for a cotton series, a polyester staple series and the 23 MPG from the mid-1990s, using the 1995-1999 period as the base. Additionally the prices used are US dollar prices to remove the effect of our floating exchange rate. While the cotton and polyester staple prices are close to parity with their levels of 20 years ago, the 23 MPG is nearly 150% higher. That is some out performance.

Figure 3 compares the supply of 21-23 micron wool (AWTA farm bales) with the difference between the price index for the 23 MPG and the average of the cotton and polyester staple indices shown in Figure 2. It is a similar story to that shown in Figure 1. Supply explains around three quarters of the 23 MPG out performance of the major fibres.

So, what are the take home messages from this?

Firstly, if any marketers start claiming credit for the high prices keep in mind that supply accounts for three quarters of the out performance for broad merino wool, with the drop in the exchange rate in 2014 also helping mightily in recent years.

Given that low fine wool premiums have been grinding on for 4-5 years, the relative attraction of broad merino wool is strong. The relationship between price and supply indicates that price or relative price is sensitive to changes in supply, so increases in supply are likely to see decreases in prices (as has happened for fine wool). 

What does this mean?

High broad merino prices have been bought by slashing production. The 75% fall in the 21-23 micron production in Australia (from around 2 million to half a million farm bales) has underpinned big absolute and relative rises in broad wool prices. It is conceivable that production could increase by a couple of hundred thousand bales in the next 5 years, especially if seasonal conditions are favourable. In such a scenario it is not hard to see the broad merino MPGs losing a couple of dollars as a result.

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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