By Andrew Woods, ICS | Source: MLA, AWEX, ICS
Last week, Mecardo examined if wool price volatility had changed with the drop in supply of the past 25 years. This week, we take a different look at price volatility by looking at the change in price during a rolling four-year period. Specifically, the rise in price from the lowest price and fall in price from the highest price of the preceding four years is shown for wool, lamb and beef. The idea is to look at and compare the cyclical variation in prices between the three commodities.
The old saying that “markets halve and double” shows up nicely in this analysis. A four year period has been used because that allows for most price cycles to have run their course. It also captures the large price volatility that standard hedging and farm planning cannot avoid. Each chart shows the price series for the commodity along with the rise in price from the lowest level of the previous four years and the fall in price from the highest price of the previous four years.
Figure 1 looks at the median merino micron (MMM) category price from 1991 onwards (right hand axis). The variation in price over the rolling four year period is shown by the left hand axis. The MMM has had three big rising cycles during the past 25 years, where prices have lifted by 100% to 150% from previous lows in 1994-5, 2002-3 and 2011. There was a minor rising cycle in 2007-8.
On the downside, prices in the early 1990s fell by nearly 70% in the wake of the collapse of the Reserve Price Scheme. Subsequent down cycles in the late 1990s and in 2005 were 45% below the previous high. Since 2009, the down cycles have only fallen by 30%, reflecting the lower volatility noted in last week’s article.
Figure 2 provides the same analysis for a trade lamb saleyard price series for NSW. The rising cycle of the mid-1990s was amplified as the market came off a crushingly low level when the flock was being liquidated following the collapse of the Reserve Price Scheme. However, the lamb market in 2004 was up by 300% on the low levels of the previous four years and the 2011 market was up by 180%. Down cycles tend to be limited to a fall in price of 50%.
Figure 3 applies the same analysis to a NSW trade steer saleyard price series. Compared to the highly volatile lamb price series, the trade steer price is quite sedate. It has had two cycles where the prices have risen by 100% (give or take a bit) with the current market being the second cycle, following the 2001 peak. There have been three smaller cycles where prices have lifted by 40-60%.
On the downside, falling price cycles have been limited to 20-30% during the past decade. Earlier down cycles were limited to a fall of around 40%.
Price volatility tends to be viewed as a bad thing by farmers (and processors, but not traders) but that tends to apply to falling price cycles rather than rising price cycles. However, volatility is inherent in commodity prices, with the long run average returns the ultimate measure of the suitability of an enterprise. For commodities where the price can be managed, it is important not to cut out the occasional major price cycle, as these are required to lift long term returns. As it is most likely that commodity prices will keep halving (from cycle peaks) and doubling (from cyclical lows), price volatility is something farmers and the supply chain will have to continue coping with.
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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