By Andrew Woods | Source: IMF, RBA
Commodity prices have been in the news recently, with oil prices halving during the past year and iron ore prices halving during the past two years. The Australian dollar has weakened as it finally follows the lead of Australian terms of trade, doing its job of being a shock absorber for the economy. This article looks at the relative price rankings of Australian agricultural commodities.
Figure 1 shows the five year price ranking for a range of commodities in Australian dollar terms, with the rankings sorted from high to low. The highest ranked commodities (fishmeal, olive oil and hides) are trading at 100% (or their highest prices) in five years. At the other end of the scale, iron ore is at 0% (or the lowest price) in five years, with cotton trading at 2% (meaning it has traded at lower levels for only 2% of the past five years).
In between, beef holds the best rank along with 30 MPG, trading above 90%. Next in line is lamb with a rank around 80%, the median merino price at 50%, and wheat not far behind. Australian agricultural commodity prices range from near 5-year highs to 5-year lows - quite a spread. Figure 2 shows similar analysis to figure 1 but in US dollar terms. The order of commodities is similar, except that the 30 MPG slips back to the same level as lamb.
From a wool point of view, the list of commodities includes a range of wool categories and other apparel fibres. This gives a feel for how wool prices are travelling in relation to the greater apparel fibre markets.
The concerning issue for wool prices in 2015 is that cotton is close to 5-year lows even with a substantially weaker Australian dollar. In US dollar terms, cotton and polyester staple in Asia are both trading at 5-year lows.
With the two big apparel fibres trading at such low levels, it is unlikely wool prices will be rise by much in 2015, beyond any short term rallies. The cotton industry will finish with higher stocks again this season, roughly double normal levels. There is some pain to come for cotton prices, which will unfortunately be felt by other apparel fibre markets.
In A$ terms, red meats are the best performing commodities, along with crossbred wool. Cotton is the worst performing, with the low price reflecting massive stocks on hand. Low cotton prices are required to lower production to allow stocks to be drawn down.
Wool categories are spread across the rankings, with crossbreds doing the best and the 16 micron doing the worst. This reflects the large increase in fine wool production over the past two years because of the seasonal conditions. Despite the regular reporting of crashing commodity prices, some are doing very well, some are at reasonable levels and others are in a world of pain.
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