Mecardo Analysis - Wool quality and AWEX MPGs
- By: "Farm Tender" News
- Ag Tech News
- May 30, 2019
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By Andrew Woods | Source: AWEX, ICS.
A question was asked recently about the relationship between the clip quality and the micron indicators (MPGs) published by AWEX. Specifically, the questioner wanted to know whether the MPGs were falling because of the poorer quality Australian clip or because of weaker demand. This article takes a look at this question.
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We have started with the 17 micron category where quality has quite an influence on price. Figure 1 breaks all the rules by having far too much information jammed into it, but bear a thought for exporters who need to be keeping this sort of tally running during auctions as they build consignments. It shows some key specifications for median-priced 17 micron fleece (70 mm and longer) for the past decade. The data is shown as monthly averages and includes staple strength, point of break in the middle, yield and vegetable fault. To obtain this data, the median price was calculated by month and then the specifications (+/- 5 percentiles) were calculated.
The average yield tends to be in the high 60s, rising into the 70s. In the current month, the yield has fallen to a decade low of around 63%. Staple strength tends to oscillate around 35 N/ktx and is currently low, around 30 N/ktx. Point of break in the middle generally varies from low-40s to mid-50s. Vegetable fault, which varies, is high at present (around 1.4%).
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On the whole, the quality of the median priced Merino 17 micron fleece is poorer than normal. Figure 2 shows the ratio of this price series to the 17 MPG for the past decade. Parity (1.00) tends to be the upper limit with 0.94 generally the lower limit, although this was exceeded in August 2011. This means the median 17 micron fleece price is generally between 94% and 100% of the 17 MPG. Since late 2018 the median 17 micron fleece price has traded between a low 0.94 and 0.96 of the 17 MPG. If anything, the 17 MPG has been overstating the market for the median 17 micron price. The 17 MPG has certainly not been dragged artificially lower by poorer quality wool on offer.
Figure 3 compares the actual prices series used to calculate Figure 2. It shows the median 17 micron fleece price and the 17 MPG track closely together, getting slightly out of line occasionally. The 17 MPG is not designed to be used a valuation tool, so the 4-5% “slop” in the price ratio shown in Figure 2 is simply part and parcel of the variation between sections of the market and an indicator.
The median year on year absolute change in the 17 MPG during the past decade has been around 18%, and 17% for the median 17 micron fleece price. The 17 MPG is doing a good job as an indicator in showing the general level of the 17 micron fleece market.
Key points
* The current median price 17 micron fleece has low staple strength, high vegetable fault and a decade low yield.
* As the quality of median priced 17 micron fleece has declined since late 2018, the 17 MPG has maintained a relatively wide premium.
* The 17 MPG does a good job of reflecting price movements in the median 17 micron fleece price.
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What does this mean?
To a degree, separating the effect of quality and demand on AWEX MPGs is impossible as they are intertwined. There is a 5-6% variation in the relationship (basis) between the 17 MPG and the median 17 micron fleece price and quality will impact on this basis. The AWEX MPG (in this case the 17 MPG) tracks the median fleece price very well, with the efficiency of this correlation increasing as the timeframe increases. The variation seen in the basis between the median fleece price and the MPG means the MPG may not reflect all of the market movements in the very short term, but keep in mind it is an indicator not an actual measure of price.
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