Mecardo Analysis - Weekly wool offerings and the EMI
- By: "Farm Tender" News
- Ag Tech News
- Sep 04, 2018
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By Andrew Woods | Source: AWEX, RBA, ICS.
With reported wool stocks in the supply chain at very low levels, logic suggests that fluctuations of greasy wool offered for sale at auction in Australia will play a greater role in price determination. This article takes a brief look at wool offerings and the EMI since the middle of 2017.
Figure 1 shows the volume of wool offered for sale (in thousands of farm bales) in 2018, along with the EMI. Volume uses the left hand scale and the EMI uses the right hand scale. After peaking in April, the volume offered declined steadily through to late June. At the same time, the EMI climbed steadily by around 300 cents. In terms of correlation, there is a very tight fit between offer volumes and the EMI (in Australian dollar terms) in the period April through to June. From late June, the volume jumped back up and the EMI steadied, before jumping again when the offer volume fell in mid-August. The volume has fallen again this week and prices look to have steadied after a very short correction.
The story told in Figure 1 appears to be a coherent one. Figure 2 is the first test of this story. It repeats the format of Figure 1 using an EMI in US dollar terms instead of the Australian dollar EMI. In US dollar terms the correlation between the EMI and the offer volume in the April through June period weakens. The EMI rose by around 12%, less than the 17% rise seen in Australian dollar terms. The timing varied also. The US dollar price peaked three weeks before the offer volume bottomed out.
Is the correlation between volume and price a standard pattern? Figure 3 compares the EMI in Australian dollar terms and the weekly offer volumes for 2017. The mid-year dip in volumes shows up, as it did in 2018. In 2017 the EMI weakened slightly and then steadied, showing no correlation to the weekly supply. So, the pattern seen in 2018 is a function of factors peculiar to 2018.
In Figure 4 the year on year change in the weekly offer volume is shown for Australia from mid-2017 onwards. From late 2017 onwards weekly offer volumes have been more often than not below year-earlier levels. Note the burst of increased volumes from August 2017 through to October 2017. The EMI sagged during this period (see Figure 2) which is not unusual for prices during the spring. Figure 4 is showing the year on year offer volumes have opened the current season well below year-earlier levels, which the buy side of the industry will be watching and concluding that this early trend in conjunction with drought points to further falls in supply during 2018-2019.
Key points
* The seasonal fall in offer volumes during the June quarter was accompanied by a 17% rise in the EMI in Australian dollar terms.
* This strong correlation weakens when the EMI is viewed in US dollar terms.
* In 2017, the EMI exhibited no response to the June quarter dip in supply.
Offer volumes in 2018 have been more often than not below year-earlier levels and have weakened significantly since June.
What does this mean?
Merino wool prices appear to be showing increased sensitivity to the weekly volume of wool offered for sale. Such sensitivity makes sense in light of the repeated comment about minimal stocks along the supply chain. The relation between supply and price varies, as evidenced by the lack of price response in 2017 to the mid-season dip in offer volumes, so don’t bank on prices remaining negatively correlated to weekly offer volumes indefinitely. In the short term, supply looks set to continue below year-earlier levels which will be supportive of price.
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