Mecardo Analysis - CM-NM premiums

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By Andrew Woods | Source: AWEX, ICS

Key points

· Higher strength 16.5 to 17.5 micron fleece wool has shown the largest premiums for CM-NM in the past season.

· There looks to be a rising trend in the premiums from mid-2017 for these finer micron categories.

· In the broader Merino micron categories, the calculated premium is much smaller and without any discernible trend.

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The level of premiums for CM-NM wool is an oft asked question. Premiums for ceased mulesed/non-mulesed (CM-NM) wool started to really show up in wool auctions at the beginning of last season, so this article takes a look at such premiums during the past two seasons.

Traditionally, price analysis of the greasy wool market looks at the different characteristics of the wool lot and apportions a value to these characteristics. The implied assumption is that to value the wool you simply add up the values for the different components to arrive at a price. This is the additive pricing or "Lego block" model.

The reality is more complex. Some wool characteristics are more important than others in the sense of masking the price effect of other characteristics, and the relative importance changes with variations in supply. For example, assume a Merino fleece lot with generally good specifications and declared CM-NM also has a very high coefficient of variation of length (pointing to mixed length). The good specifications and CM-NM mean little as the lot, from a buyer's perspective has risk (poorly classed) and from a processors perspective is more like a pieces type. The lot will be valued probably somewhere between a good piece and an average fleece price.

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This increases the complexity of determining the value of wool characteristics i.e. premiums and discounts, as their effect sometimes depends on what other characteristics the lot of wool has. An alternative analogy to valuing wool is to think of wool lots being run through a series of drafts, with lots steered into different bins (a bin for black wool, a bin for high vegetable fault carbonising combing wool, a bin for Saxon fleece wool and so on) where fine-tuning of price can take place.

Now to the price effect of CM-NM. The former has been a preamble to help explain the analysis used for this article. A narrow filter for Merino fleece wool from 16.5 to 20.5 micron for the past couple of seasons has been used, comparing fleece with a CM-NM declaration to comparable fleece without a CM-NM declaration. This means the analysis does not include Merino fleece wool with low yields, high mid-point breaks, high vegetable fault, short length, over length or a subjective fault such as cott.

Table 1 shows some seasonal median premiums for CM-NM declared wool by micron and staple strength. From the points mentioned above, this analysis is far from perfect but it gives a feel for the full season effect. The better strength 16.5 and 17.5 micron Merino fleece categories enjoyed a strong premium of 2.9-3% in 2018-2019. The premium is lower for the lower strength levels and the broader micron categories.

Figure 1 shows the underlying monthly data for the two 17.5 micron series, starting in July 2017 and running through to last week (early August 2019). Some simple linear trend lines are overlaid on the two series to highlight the increasing nature of these premiums during the past couple of seasons. The presence of the trend gives more confidence in the analysis.

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By contrast Figure 2 repeats the process for the 19.5 and 20.5 micron series. There is no real discernible trend in the data. A small proportion of CM-NM wool and an acute shortage of broad Merino from early 2018 onwards may have upset the ability of premiums to show up.

What does this mean?

For Merino fleece wool with specifications attractive to Italian mills (although some Chinese mills are also interested), wool with a CM-NM declaration can attract sizeable premiums, on average. At this stage, if the wool is tested as over length or with very low staple strength or is poorly classed then the wool is drafted to another processing bin and is priced without premiums. Premiums for CM-NM for broader Merino wool (where the supply is low) are much lower.

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