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Tuesday, October 15, 2013

Wool is on a roll, are the Percentiles telling us anything?

By Robert Herrmann, Harrison Bardwell  |  Source: AWEX, AWI, ACU

Key points

  • Medium wool percentiles are close to 90% for the past 10 years and between 80-85% for the past 5 years
  • Fine wools are clearly underperforming the medium wools based on the percentile analysis.
  • Medium wool forward contracts are a better hedge option at the moment. Percentile analysis supports this idea.

When a market rallies strongly, it is sometimes difficult to make selling decisions. Is this the beginning of a new up cycle, or is this a short term rise and therefore a strong selling signal?

The current wool market lift is presenting these questions; we know that sheep numbers are low and therefore production is limited. We also know that wool supply in the spring has traditionally dampened prices and that in recent times the market has pulled back as a result of resistance from buyers when the market reaches certain levels (i.e 1250¢/kg for the 21MPG).

While not the only market analysis tool available, percentiles can help put the market in perspective and support marketing decisions for current and future sales. So how do you interpret price percentiles?  

A percentile is a measure of how often, historically, prices have fallen above or below a particular price.  So, for example, if a price is at its 67th percentile, this means that 67% of historical prices have been below that value, and 33% of prices higher.  Similarly, a 90% percentile means that, 90% of the time, prices have been lower than a particular price, and higher just 10% of the time.

In table 1, we look at the percentile ranks over the past 10 years, and in table 2 we look at the past 5 year period. This current percentile snapshot shows the mid wools clearly outperforming the finer types. While the medium wools are close to their 90th percentile for the past 10 years, the 19MPG and below is varying between 70% and 85%, with the finer types at the lower end. Based on this analysis, the fine wools are more likely to see an upside than their mid wool counterparts.  

As a final note, percentiles can be used as an alternative for estimating what will happen in the future by looking at what has happened in the past. Previous prices will obviously not tell you where the price will be next year or the year after, however they can provide an indication of the range in which prices have moved and how much time they have spent at varying levels. In addition, percentiles provide a general view on whether prices are more likely to fall or to rise in the future.   

2013-10-15 Wool Is On A Roll FIG 1 V2

What does this mean?

If we agree that history is a good indication of what will happen in the future for the wool market, then forward selling a portion of next year’s clip is the message from the percentiles. The market is more likely to pull back than rally.

The question of what percentage of the clip to hedge then becomes one of perception of the future market, and attitude to risk.

If the price is returning a good profit, and you are unsure of what the market might do in the future, then putting in place forward orders to sell up to 50% of next production at 70th percentile or above levels is sound.

If this turns out to be only the beginning of higher prices, then additional sales can be made, both for the next clip and also for subsequent clips.

Northern MPG
Northern MPG

Want to see more ?

Go to Wool data

Southern MPG
Southern MPG

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Go to Wool data

Western MPG
Western MPG

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Go to Wool data

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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