Mecardo Analysis - What do wool prices look like in Chinese RMB?

By: "Farm Tender" News
Ag Tech News
Jul 25, 2018
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By Mecardo

The vast majority of Australian wool is processed in China and a sizeable proportion of Australian wool is reported to be consumed in China. This has prompted a reader to ask, how wool prices appear in Chinese Renminbi (RMB) terms.

Exchange rates are a potentially tricky issue when looking at wool prices. The reason is that wool can proceed along a number of paths in the supply chain. At its simplest wool is purchased, for example by a Chinese integrated mill, processed and sold locally. There is effectively only one exchange rate transaction when the greasy wool is bought in Australia and paid for by the firm. In this case, the effect of the exchange rate is relatively simple. Where things become messy is where the wool is purchased, processed and then re-exported. In the latter case, there are two exchange rate transactions which may well cancel each other out, or at least neutralise the effect of the first transaction, which is of a lower value because it is for greasy wool.

With the above caveat in mind, Figure 1 shows the 21 MPG from 2008 to last week in three currencies, Australian (AUD), US dollar (USD) terms and Chinese yuan (yuan is the unit for the Chinese currency which is called the Renminbi). The price in USD and Yuan terms follow a similar pattern with some variations. It is hard to discern what differing effect the USD and Yuan would have on the demand side.

Figure 2 shows the Australian dollar in USD and Yuan terms from 2008. This shows more clearly the closely related nature of the USD and Yuan. While they do have some small independent movements, these movements are swamped by the variation in relation to the Australian dollar. Between 2010 and 2014 the Chinese RMB appreciated against the US dollar by 11%, which was a big move (over four years). During that period the 21 MPG rose in RMB terms by 68% (to a 2011 peak) and then fell by 65%. The wool price volatility swamps the RMB/USD exchange rate volatility.

There will be periods when a shift in the RMB causes some decisions to be made on the buy side of the market. However, as things stand this looks to be very much a lower order influence on price, which is not very useful for farmers selling into the greasy wool market.

Finally, Figure 3 shows the 17 MPG in the three currencies from 2008 onwards. It shows the current price in USD and RMB to be below that of the 2015 peak. The 17 micron category does not have the strong supply squeeze the 21 micron category has to push it up.

Key points

* Wool prices in USD and Chinese RMB terms follow similar patterns

* The variation in the relative exchange rates of the USD and RMB are swamped by wool price volatility.

* To date variations in the RMB exchange rate in relation to the USD looks to be a low order effect on wool price (along with a myriad of other low order effects).

What does this mean?

Exchange rates are a factor in driving wool prices, with Australian auction prices seen through the lens of a floating currency. The variation in the Chinese RMB to US dollar exchange rate is much less than the variation seen in wool prices, and so it appears to be a low order potential effect on wool price. The Chinese currency may develop in the future, in which case the level of the RMB will become a more important potential effect on wool prices but that is for the future.

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