Mecardo Analysis - How to lift Merino prices? Reduce supply
- By: "Farm Tender" News
- Ag Tech News
- Feb 28, 2019
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By Andrew Woods | Source: AWTA, AWEX, Cotlook, RBA, ICS.
The Merino wool industry is basking in high prices and has been for a number of years although drought does take the shine off things. Success tends to be claimed by many. One source of the high prices which cannot make such a claim is supply and this article takes a look at the effect of supply on price.
The analysis in this article starts in 2005-6, which is somewhat subjective. The 1990s were a period of high stock levels for Merino wool, a situation which has since reversed. At the end of the official stockpile, the greasy wool market went through a fairly standard post stockpile rising price cycle in 2002 and into 2003. Following 2003, wool had a tough few years where it underperformed other fibres, perhaps as a consequence of the out of cycle prices rises in 2002-2003. 2006 was chosen as a starting point, to avoid these issues.
Figure 1 shows the AWTA test volumes for 20-22 micron from 2005-6 through to the current season (which is an estimate). It shows the volumes falling from around 1.2 million bales to around 600,000 bales in recent seasons (a fall of 50%) with another sizeable fall this season.
To look at a price, a price ratio for the 21 MPG to the Cotlook Index has been used. The idea behind this is to account for some general apparel fibre price cycles and movements through the cotton price. The price ratio starts off around 5 and finishes around 9.5, with a strong rising trend. 2011 is an aberration, as the cotton price rose to break the peak level last reached in the American civil war, some 146 years earlier.
A trend in the wool to cotton price ratio can be developed as a guide to dominant changes in wool prices (in relation to other fibres - in this case cotton) during the past 13 years. Figure 2 shows the calculated trend in the wool to cotton price ratio overlaid on the 20-22 micron volumes for that period. As supply has fallen, the price ratio has trended higher, with supply accounting for about 85% of the change in the price ratio.
So, supply has been the dominant factor in the rising value of the 21 MPG in relation to cotton. Here is where some interesting “what if” scenarios can be developed. What if the supply of 20-22 micron wool had remained around 1.2 million bales (with a flock around 90-100 million sheep)?
We can use the trend, which is driven by supply, to adjust the price ratio and through that the 21 MPG for this scenario of an extra 800,000 bales of 20-22 micron wool. Figure 3 shows the actual annual average of the 21 MPG since 2005-6 (with the average to date for the current season) along with a price series adjusted for the change in supply. It shows prices would more likely have been in the 800-900 cents range from 2014 through 2017 and then lifted strongly to trade in the 1400-1500 cents range this season.
This scenario is only theoretical; the supply has gone and is unlikely to return, so the trend price effect is likely to stay. The point is, before the wool industry gets all self-congratulatory about demand creation and the like, it needs to understand how a lot of the current high prices have been won – by shrinking the supply, therefore, the industry.
Key points
* Falling supply explains about 85% of the trend increase in 21 micron price ratios to cotton during the past 13 years.
* Strong broad Merino prices have helped support finer Merino prices, especially since 2012.
What does this mean?
Falling broad Merino supply has underpinned the rising trend in Merino wool values during the past decade, with supply accounting for 85% of the rising trend. Since 2012 historically strong broader Merino prices have helped support finer Merino prices. That leaves around 15% of the trend increase in prices due to other factors such as marketing. Any analysis of wool prices in recent decades needs to account for the significant changes in supply which have taken place.
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