Mecardo Analysis - Crossbred prices are high but not in a relative sense

By: "Farm Tender" News
Ag Tech News
Apr 11, 2019
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By Andrew Woods | Source: AWEX, ICS.

This article is bought to you by PMG Finance.

Australian crossbred prices (as opposed to the broader New Zealand crossbred categories) are trading at or close to record levels. The 28 MPG finished last week at 1204 cents. It is not so long ago that this would have been a good price for medium and broad Merino wool. This article takes a look at crossbred wool prices.

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Figure 1 shows the 28 MPG in Australian dollar terms from 1983 through to early April 2019. After a great run in price during 2015, which was a cyclical low point for Merino wool prices, the 28 MPG fell heavily until early 2017. In 2017 the 28 MPG started to pick up through to mid-2018 and then fell heavily in late 2018 along with the general greasy wool market. Since late 2018 the 28 MPG has rebounded to new, nominal highs.

The 28 MPG looks expensive in Figure 1, which is a view shared in US dollar terms as well. Figure 2 gives an alternative view. It shows the 28 to 21 MPG price ratio from 1983 through to last week. The 1990s stand out as a time of high crossbred price ratios to the 21 MPG, reflecting the depressive effect of greasy stocks left over from the reserve price scheme. In 2015 the 28 MPG rose to 0.7 of the 21 MPG, a level it had not reached for 13 years. However, the 28 MPG price ratio tumbled after that, to extraordinarily low levels. By late 2018 it had fallen to 0.36. Basically, the 28 MPG was trading slightly above one-third of the 21 MPG level, which was an extremely low ratio.

2019-04-11 Wool 1

Since late 2018, the 28 MPG ratio to the 21 MPG has risen, finishing last week at 0.53 – basically half of the 21 MPG. So while the 28 MPG is high in absolute historical levels, relative to the 21 MPG the 28 MPG looks to be reasonable value. It is neither cheap nor expensive.

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To put the 28 micron in a wider context, Figure 3 shows the micron price curve for Merino and non-Merino combing fleece wool for February and March. The fibre diameter ranges from 13 to 38 micron. The Merino price series covers 13 to 24 micron while the non-Merino series runs from 20 to 38 micron. In Figure 3 the 28 micron category does not appear out of position. The crossbred series looks to be cheap in relation to the Merino categories, with an average discount of 20-25% in the range where the Merino and non-Merino prices overlap.

2019-04-11 Wool 3

Arguably the 28 micron category became so cheap in 2018 that it attracted renewed attention from processors who were struggling with high Merino prices, driven up by a plunging supply of broad Merino wool.

Key points

* The 28 MPG is trading at record nominal high levels in both Australian and US dollar terms.

* The 28 MPG in relation to the 21 MPG looks to be reasonable value – neither cheap nor expensive.

* Crossbred prices became very cheap in 2018 in relative terms, which appear to have stimulated improved demand.

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What does this mean?

Of its own accord, the higher price level for the 28 MPG would suggest that there is plenty of downside risk in the market. When viewed in relation to Merino prices, the 28 MPG looks simply to have climbed up from extremely undervalued levels in 2019. Lower supply is also supportive of Australian crossbred prices, as it is of Merino prices. Finally, forward bids for 28 and 30 micron still exhibit some confidence. The 28 MPG may not be so expensive after all.

www.mecardo.com.au