Mecardo Analysis - Merino cardings leading the way?

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

The Merino Cardings indicator, which is made up of crutchings and locks prices, has fallen by 38% since last August (41% in US dollar terms). This is a solid down cycle, and with stocks reported to be held overseas, a recovery in price does not seem likely in the near to medium term. This article looks at what this may mean for short length Merino fleece prices.

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In Figure 1 the Merino Cardings (MC) discount to the 19 MPG (right hand axis) is compared to the discount for 19 micron 46-50 mm long fleece wool. The series runs from 2005 to June 2019, with a quarterly (three months) interval. Starting in 2013 cardings prices had a great run and this is shown by the shrinkage of the discount from 40-55% to at its narrowest, around 20%. The MC discount reached this peak in 2016 (when combing prices were relatively low) and then retreated to a slightly lower level through to 2018. Early this season carding prices started to fall, with the MC discount widening all the way back to its old level from pre-2013, in the 50-55% range.

The second series in Figure 1 is the discount for 46-50 mm length fleece. It follows a very similar path to the MC discount, which makes sense as the staple length is similar to the better end of the wool used to develop the MC indicator. The discount for 46-50 mm length wool has fallen back to its old range of 20-25%, which is around one third of the MC discount.

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Figure 2 repeats the exercise with a discount series for 51-55 mm fleece. It too has a high positive correlation to the MC discount and trades around 0.3 of the MC discount. In the June quarter, this discount shrank in contrast to the MC discount which widened. This may be a function of “noise” in the data or it could also be a function of the lack of South African wool flowing into China.

2019-07-11 Wool 1

In February Mecardo showed how South African production dominates the 19 micron and broader 60 mm and shorter supply of Merino greasy wool (view here). The absence of South African wool would be expected to show up in the relative prices for short 19 micron and broader Merino wool. The implication here is that at some stage when South African wool can flow back into China the discount 51-55 micron 19 micron wool shown in Figure 2 will widen and play catch up to the MC discount.

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In Figure 3 the analysis is repeated for 61-65 mm length Merino fleece. The correlation between short length discounts and the MC discount weakens once the staple length rises above 60 mm. However, the wider MC discount from mid-2018 has been followed by a wider discount (albeit at a much smaller level of 8% versus 50%) for the 61-65 mm length wool.

2019-07-11 Wool 3

Key points

* Merino cardings prices have fallen substantially this season, with discounts to combing prices widening back to pre-2013 levels.

* 60 mm and shorter fleece discounts tend to follow the same path as Merino cardings discounts, albeit at different discount levels.

* In recent quarters, the discount for 51-60 mm length fleece has not dropped in line with the MC discount, which suggests there is some downside risk for 51-60 mm length Merino prices.

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What does this mean?

From 2013 to 2018 cardings prices rose especially in relation to combing prices, to unprecedented levels. The question at the time was “is this sustainable?”. The answer seemed to be “yes”, by 2017 and 2018. Now we know the answer was “no”. With the increase in carding discounts, the prices for shorter staple fleece, mainly 60 mm and shorter, have also fallen. However, in recent months, the discounts for 50-60 mm fleece have not followed the MC discounts. This may be due to the hold up in South African supplies, with the implication that at some stage the discounts for 50-60mm (and with some drag on 61-66 mm prices) will play catch up and widen further.

www.mecardo.com.au