Mecardo Analysis - 21 MPG price cycle – where to now?

By: "Farm Tender" News
Ag Tech News
Jun 13, 2019
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This article is bought to you by Forest Springs Merinos.

By Andrew Woods | Source: AWEX, ICS.

The Merino greasy wool market has had a great run since 2015, aided by a step down in the exchange rate in 2014. With prices for apparel fibres generally struggling and slower economic growth expected in the major markets, the probability for an end to the rising price cycle of the past four years appears high which implies a subsequent down cycle. This article takes a look at down cycles in the 21 MPG during the past 25 years.

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The term “price cycle” can be misleading in that it implies a regularity of price movements through time. History can give us an idea of probable price movements and the time taken for major trends within “price cycles”. This caveat is given to prevent the reader from thinking the greasy wool market acts in a mechanistic way. History is a guide, not a map.

Figure 1 shows the monthly average 21 MPG (eastern and in Australian dollar terms) from 1993 through to May 2019. The key cyclical peaks and troughs are denoted, along with the price change and time taken to reach this level. Table 1 shows the details for each peak and trough shown.

2019-06-13 Wool 1

The most recent peak was in February, when the 21 MPG peaked at 2371 cents which represented a rise of 120% (fairly standard) over 77 months (a long period). Note that the 21 MPG had nearly reached this level in June 2018, before rebounding in February.

So, assuming the cyclical top is in place, what is the downside given the dire supply for broad Merino wool in Australia? Before considering the supply side, we should look at historical down cycles since the 1990s.

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The median downturn since the 1990s for the 21 MPG has resulted in a fall in price of 35% in a period of 15 months. Assuming we start from February, that yields a target trough of 1540 cents in the middle of 2020. The average downturn is close to the median with a fall of 38% in 19 months. For the sake of simplicity let’s take the target trough as 1500 cents in late 2020.

With regard to supply, the amount of time under consideration is critical. The longer the timeframe (19 to a maximum of 35 months) the greater the chance that seasonal conditions will swing back to median (hopefully better) and doing so swing the Merino micron to the broader side, thereby increasing the supply of broad Merino wool. Such an increase cannot begin until late 2019 and will be off a low production base but it would be an increase and that would help deflate broad Merino prices which are “out of position” in relation to the other parts of the greasy wool market. Keep in mind the Merino Cardings indicator has fallen by 31% since last September.

Key points

* The 21 MPG looks to have reached a cyclical peak, having risen by 120% over 77 months.

* The median downturn of the past 25 years has been a fall in price of 35% in 15 months.

* The 21 MPG is already down 8% from its February peak.

* Using the median/average down cycles as a guide the target price for the 21 MPG is around 1500 cents in late 2020.

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What does this mean?

History shows there is plenty of room for variation in the scope of price falls during a down cycle, and how long these cycles take to play out. In the absence of a reliable crystal ball, we can use past median/average down cycles as a guide. Doing this gives a target of 1500 cents in late 2020 for the 21 MPG. However, this projection is sensitive to the time taken and the rainfall that falls during the down cycle as it will have a big impact on the supply of broad Merino wool.

www.mecardo.com.au