Mecardo Analysis - Cheap wool in the greasy wool market
- By: "Farm Tender" News
- Ag Tech News
- Sep 13, 2018
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By Andrew Woods | Source: AWEX, RBA, Riemann, ICS, Mecardo.
Bids for 28 and 30 micron were boosted late last week, extending out to May 2019. The bids are discounted to the current market but their appearance suggests demand is set to improve for the key crossbred micron categories in the Australian clip. What about wool on the broader side of the crossbred distribution? This article refreshes the view of broad Australian crossbred prices.
If there is any greasy stock floating around brokers store at present, broad crossbred wool will make up a fair share, plus the Kiwis will probably have more stashed away as well. The reason for these stocks is that prices for 32 micron and broader wool is cheap (as Mecardo showed last June). Figure 1 shows the average monthly price for 34 micron wool sold at auction in Australia since 1996 to last week. The price series continues to languish at the upper end of its low trading range of the past two decades, which is roughly between 250 and 300 cents clean.
Figure 2 shows the same series in US dollar terms. In US dollar terms the 2002 price cycle disappears, as it was a function of a low Australian dollar. The 2011-2016 period stands out as a time of very strong prices. The current price level continues in the range traded in between 2003 and 2010. There still appears to be little downside risk in price.
Why the mention of increased bids for 28 and 30 micron on the Riemann platform (View here)? Figure 3 shows the 34 micron average price expressed as a price ratio of the AWEX 32 MPG from 1996 onwards. The current ratio is around 0.6, which is low. It has been lower but for only short periods of time. On a five year lookback period, the 32 MPG is trading at a percentile level of 35% in Australian dollar terms and 31.4% in US dollar terms. In other words, the 32 MPG is low and the 34 micron price is discounted to the 32 MPG by about its maximum level. Any strength in the 28 and 30 MPGs will help pick the 32 MPG up and the implication/suspicion is that this effect will eventually help pull the 34 micron price higher.
Key points
* The 34 micron price continues to languish at low levels, in Australian and USD dollar terms.
* The 34 micron price is deeply discounted to the AWEX 32 MPG.
* Increased bids in the forward market for 28 and 30 micron suggest some extra demand is likely to turn up for the main Australian crossbred categories.
* Assuming the improved demand for 28 and 30 micron wool turns up there is a reasonable chance it will have a pull effect on 32 and 34 micron prices.
What does this mean?
The low price level for 34 micron wool still indicates there is minimal downside price risk for 34 micron wool. The flipside to this is that there is plenty of room for prices to lift, in the event demand improves. Improved 28 and 30 micron forward bids suggest some improvement in demand for crossbred wool is stirring (although crossbred prices are already at relatively high levels) which might help the languishing 34 micron prices.
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