Mecardo Analysis - Fibre price perspectives

By: "Farm Tender" News
Ag Tech News
May 21, 2019
439 views
Share

This article is bought to you by CommStream Capital.

By Andrew Woods | Source: AWC, AWRAP, AWEX, Cotlook, PCI Wood MacKenzie, Emerging Markets, RBA, ICS.

Wool is a group of fibres (think Merino and crossbred, combing and carding, apparel and carpet) which is in turn embedded in a larger group of fibre markets. As such, wool prices are not independent of the wider fibre markets. With this in mind, this article looks for some perspective on current Merino prices.

Ad - When it comes to innovative Farm Finance, CommStream Capital is leading the field. Check them out here - Ad

Figure 1 shows the rolling five year price ranks for a cotton price series and the average Merino micron price, in US dollar terms. US dollar terms are used as we are interested in looking at the markets as the supply chain would. The series start in the mid-1980s and run through to April. They range from 0 (lowest price in relation to the preceding 5 years) to 1.0 (highest price in relation to the preceding five years). Generally, the two series move together, occasionally getting out of line but ultimately moving back into line.

The current market shows cotton prices to be slightly above their 5 year median level (in the range of 0.5 to 0.6) while the average Merino micron price is still in its second highest decile. Note the average Merino micron price has eased from the peak levels of 2018 but remains at substantially relatively higher levels than cotton prices.

In Figure 2 the process is repeated using an acyclic fibre price series in place of the cotton price series. The acrylic price rank is also in the 0.5 to 0.6 range.

2019-05-21 Wool 1

The general picture from the acrylic and cotton price ranks is that the average Merino micron price is a couple of price deciles (five year lookback) above the general apparel fibre market.

What does this tell us? Since April the Merino price has eased and is down to a rank (in USD terms) around 0.75. If it were to work back down to a rank of 0.6, the USD price would have to fall by US250 cents. Will that happen in the short to medium terms? Unlikely, as the supply shortage has been the primary driver of the outperformance of the Merino price and this factor will take some time to dissipate. However, the lower price ranks of cotton and acrylic indicate wool prices will have downward pressure on them, unless prices for these major fibres start to rise.

Ad - When it comes to innovative Farm Finance, CommStream Capital is leading the field. Check them out here - Ad

Figure 3 compares the rolling five year price ranks for the Merino Cardings indicator and acrylic fibre. Note the outperformance of cardings in the 2014-2017 period when they traded at high price ranks while the other fibres suffered weak price ranks. Currently, Merino cardings are in a different position to the Merino combing prices. The cardings price rank is below the greater apparel fibre market (and has weakened again in May). This indicates that cardings are not overpriced.

2019-05-21 Wool 3

Key points

* Merino combing price ranks are well above the comparable price ranks of cotton and acrylic.

* The current disparity in price ranks between Merino combing and the other fibres translates roughly into US250 cents per kg.

* In contrast, Merino cardings have a relatively low price rank, below that of cotton and acrylic.

Ad - When it comes to innovative Farm Finance, CommStream Capital is leading the field. Check them out here - Ad

What does this mean?

Merino combing prices continue to outperform cotton and acrylic prices, in the order of US250 cents. The pressure on Merino combing prices will be downwards, as designers at the fabric stage work to dovetail the high Merino prices into blends which allow apparel to meet retail points. In contrast, Merino Cardings are relatively good value, after an extended period of being relatively expensive. The relative cheapness will ultimately result in improved demand but this will take a little time to develop.

www.mecardo.com.au