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Wednesday, November 18, 2015

What are ‘normal’ wool price ratios?

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

Key points

  • The ratios of merino wool prices to the major apparel fibres (cotton and polyester staple) have changed during the past 25 years.
  • The old 3:1 ratio has not applied to the wool to cotton ratio since 2002 or to the wool to polyester ratio during the past decade.
  • The wool to cotton and polyester price ratios have increased markedly.
  • Reduction in merino wool production accounts for about 70% of the rise in the wool to cotton price ratio and about half of the rise in the wool to polyester price ratio.


2015-11-17 Wool Price Ratios FIG 1

2015-11-17 Wool Price Ratios FIG 2

The price of wool relative to other fibres is one way of getting a bead on whether wool prices are high, low or ‘normal’. In the 1980s and 1990s, a ratio of 3 to 1 was a common yardstick used for wool to major apparel fibres to mark a sustainable price. This article looks at how these ratios have changed during the past twenty years.

Figure 1 shows the volume of merino wool sold in Australia since the mid-1980s, along with the annual median merino micron price ratio to a cotton price series. The merino volume peaks in 1989-90 and then trends lower for the following 25 years, although the falling trend has slowed in recent years. The wool to cotton price ratio peaked around 7.5 in the late 1980s, about double the accepted ‘normal’ ratio of the time. Following the rising wool price cycle of the late 1980s, the price ratio returned to around 3, through to 2001.

The official stockpile of wool in Australia was finally liquidated in 2001, and the Australian wool market went through its characteristic post-stockpile strong rising price cycle (in 2002-2003). During 2002, the wool to cotton price cycle changed dramatically, effectively doubling to a ratio in the 5 to 6 range. Since that time, the wool to cotton price ratio has ranged from a low around 5.5 to a high around 8. In recent years, the enormous level of cotton stocks and subsequent low cotton price has helped boost the wool to cotton price ratio.

Since the collapse of the Reserve Price Scheme, the falling volumes of merino wool account for about 70% of the change in the wool to cotton price. The most significant change took place in the years after the liquidation of the stockpile in 2001.

Figure 2 shows a similar analysis as figure 1, but for the wool to polyester staple price ratio. This price ratio has also risen as the merino volumes have fallen, although the change in volume only accounts for about half of the change in price ratio. The ratio gently trended higher from the early 1990s onward, and then lifted to new levels after the global financial crisis in 2009. It has traded in the 4.5 to 6 range since 2009, on par with the peak level reached in 1988.

This simple analysis shows that any discussion of wool prices (for example when examining the effect of marketing on wool prices) needs to take into account changes in wool volumes and where the other major apparel fibres are trading, in addition to exchange rates. 

What does this mean?

Falling merino wool production during the past 25 years has helped to increase the wool price in relation to both cotton and polyester prices. The old 3:1 ratio from the 1980s and 1990s does not apply, with the price ratios lifting to new higher levels. Any discussion about wool prices needs to take into account where the other major fibres are trading as well as changes in the supply of merino wool. Simple presentations of Australian dollar prices, without taking these other factors into account, can be misleading.

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