Mecardo Analysis - Merino supply & price

By: "Farm Tender" News
Ag Tech News
Apr 09, 2019
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By Andrew Woods | Source: AWEX, ICS.

This article is bought to you by Post Straightening Service.

Prices for greasy wool are excellent for 30 micron and finer, and they have even started to improve for broader than 30 micron. Conditions are challenging for the supply chain, as raw wool prices have been pushed to current levels by low supply, which is not going to reverse quickly. This article takes a closer look at the relationship between price and supply for Merino wool.

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The Australian Wool Exchange (AWEX) produces Micron Price Guides which are indicator prices for full-length Merino fleece, and reflect the market well. However, the lack of suitable types for these indicators limits the micron range they can be successfully developed for. For this article, a simple average price per micron category for sound fleece wool longer than 50 mm, with no subjective fault and vegetable matter below 2% is used.

Usually, the best way to see supply influencing price is to look at the change in supply versus the change in relative price (in this case, micron premiums and discounts). This allows for the larger factors external to the greasy wool market, such as economic growth and major fibre price cycles, which push the whole greasy wool market up and down, to factor in. In the current market however, changes in supply are quite extreme and correlate well with simple changes in price.

Figure 1 compares the change in supply (sales) for the January to March period this year by micron category with the change in price for the same period. The micron categories are shown for each point of data on the scatter plot. Change in volume is shown along the horizontal axis and change in price along the vertical axis. It shows the story of the past 12 months, with broad (broader than 19 micron) Merino volumes down by extraordinary proportions. Price for these categories has consequently risen.

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Figure 1 neatly demonstrates how change in supply can account for the change in prices that we have seen across the different micron categories. If the prices are converted to micron premiums and discounts (to a base 19 micron price), a very similar chart to Figure 1 is produced.

Figure 2 repeats the process but uses data for 12 months earlier. It is looking at the change in supply and price for Merino wool between the March quarter of 2018 and 2017. It is an interesting graph. The general relationship between supply and price as seen in Figure 1 persists, although all prices have risen even where supply is higher.

2019-04-09 Wool 1

What is interesting about Figure 2 is firstly the variation in categories with falling supply. 15 and 16 micron volumes were well down on year-earlier levels and consequently had the best price rises. Broader Merino volumes were down in early 2018, mainly as a consequence of falling production in Western Australia, and prices for these categories also lifted. Only 18 and 19 micron volumes had increased, and as a consequence, they had the weakest price rises of all the categories shown.

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The relationship between supply and price is not always so strong, and there are periods when the relationship breaks down. However, when considering why greasy wool prices have changed (especially in a relative way between micron categories), the first factor to look at is supply.

Key points

* Supply can account for 90% of the change in price we have seen in the different Merino micron categories during the past year.

* Looking back 12 months, supply had a similar effect in the 12 months to early 2018.

What does this mean?

As Mecardo has said before, the Merino wool industry is buying high prices with much-reduced supply, which is not a sustainable strategy. In the past year, this has been primarily a function of drought. However, the industry needs to understand that reduced supply will mean the supply chain will ultimately need to slim down to match the available raw material. The other point to note is that when production swings broader on the back of improved seasonal conditions, the relative prices for the different micron categories will re-adjust accordingly.

www.mecardo.com.au