Mecardo Analysis - Merino prices following the general price cycle
- By: "Farm Tender" News
- Ag Tech News
- Dec 06, 2018
- 435 views
- Share
By Andrew Woods | Source: AWEX, RBA, Wood Mackenzie PCI, Emerging Markets, ICS.
The major apparel fibres most recent peak in price was in the middle of 2018, which in US dollar terms is also when the Merino market peaked. This article takes a look at the average Merino micron price and an acrylic price series.
Wool is part of a larger apparel fibre complex. This is something that Mecardo continues to return to, because it helps to understand why wool prices are where they are, and from that hopefully some insight into price risk can be gleaned. It is also useful to keep this in mind when discussion about wool marketing, and its effects, focusses solely on wool prices, without taking into account the general apparel fibre complex backdrop.
Figure 1 compares a price series (in US dollar terms) for the average Merino micron from 1995 onwards to an acrylic fibre price series. Merino wool is worth a lot more per kg than acrylic, so the Merino series uses the left hand vertical axis while acrylic uses the right hand vertical axis. Note the commonality between the general trends and cycles of the two series. True, wool prices are above the 2011 peak levels while acrylic is not but then wool has an undersupply problem which the major apparel fibres do not.
In Figure 2, rolling 2 year price ranks (percentiles) are shown for the two series from Figure 1. The graph is a little messy. It shows the rolling price relative to the level of the preceding 24 months, with a rank of 1.0 the highest in 24 months and a rank of 0 the lowest. For Figure 3 the rolling 2 year percentile rank for acrylic is taken and used to generate a wool price series, using wool prices form the previous 24 months. The resulting model simply uses the acrylic price rank and looks up the historical wool price for the past two years to arrive at a theoretical average Merino micron price.
The object of Figure 3, which compares the average Merino micron wool price in US cents per kg terms with the model price described above, is to help understand how the wool price is tracking in relation to other fibre prices, in this case, acrylic. Unfortunately, this technique has no forecasting capability, as we do not know where the acrylic price and its consequent rank is off to. However, it does have good hindcast ability, helping explain why wool prices have moved as they have.
Is the Merino price following the lead of the acrylic price? The answer is no, it is more likely the acrylic and wool prices are responding to a common set of factors including general demand factors and macroeconomic factors such as inflation.
Given apparel fibre prices are generally rolling over, it appears likely the strong rising price cycle from 2015 has probably run its course. If greasy wool supplies were steady it would appear likely that prices would trend lower in the coming years. However, supply is quite uncertain.
Key points
* The general trends and cycles seen in the Merino price can also be seen in acrylic price series.
* The acrylic price series can be used to a build quite a good (historical) price model of the average Merino micron price.
* In the long run, some 70-80% (this estimate varies and depends on how it is measured) of wool prices can be accounted for by the general apparel fibre price complex.
* Major apparel fibre prices appear to have peaked for this cycle in 2018
What does this mean?
While the Merino price has been boosted in 2018 by a consistent lack of 21-23 micron wool, the underlying price cycle which looks to have peaked in mid-2018 is common amongst the major apparel fibre prices. A cyclical peak in price looks to have taken place. Merino supply uncertainty in 2019 is shaping up as a factor to help soften the down cycle.
Share Ag News Via