Mecardo Analysis - Big discounts starting to work for finer crossbreds
- By: "Farm Tender" News
- Ag Tech News
- Jan 17, 2019
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By Andrew Woods | Source: AWC, WI, AWEX.
Finer crossbred prices have jumped this week, with 26 and 28 micron indicators up by 40 cents on the first day of sales (Tuesday). Compared to Merino combing and carding prices, crossbreds have been cheap in recent years. The broader the crossbred, the lower the price as New Zealand farmers will attest to. This article takes a brief look at the 28 micron category.
To get a feel for the price of 28 micron in relation to Merino wool, Figure 1 shows the 28 micron indicator expressed as a ratio (proportion) of the 21 micron indicator from 1983 through to early this week. In the 1980s the 28 micron indicator ranged roughly from 0.45 to 0.65 of the 21 micron indicator.
With the collapse of the Reserve Price Scheme (RPS) in 1991, the basis changed. Merino prices were depressed by the enormous stock overhang of the RPS, which pushed Merino prices down in relation to crossbred prices. The 28 micron ratio to the 21 micron indicator in the 1990s traded roughly between 0.6 to 0.85, with very brief periods beyond the extremes in this basis.
With the final liquidation of official stockpiles in 2001, the 28 to 21 micron ratio dropped back to the range traded in the 1980s. The boom in crossbred wool in 2015 briefly pushed the basis higher, before the hangover from the 2015 boom helped to push the basis down to new lows around 0.4, from which it has lifted slightly this week.
While the price ratio is of interest and shows the relative value of the 28 micron in relation to 21 micron, the absolute price levels for Merino and crossbred are of importance as well. Figure 2 shows the 21 micron indicator in nominal Australian cents per kg clean terms from 1983. The run-up in price during 2018 has certainly helped to push the 28 to 21 micron basis lower.
Broad Merino prices are high in nominal terms, and relative to general apparel fibre prices so relatively cheap crossbred prices make some sense. The continued high Merino prices, supported by undersupply must be making processors look closely to crossbred wool with a view to using it because it is relatively cheap.
Finally, in Figure 3, the 28 micron indicator is shown in US dollar terms from 1983 onwards. While the 28 micron indicator is very cheap in relation to Merino wool, in historic US dollar terms it is trading at high levels, roughly between US550 and US750 cents in recent years. This price series tells us the supply chain was happy to follow Merino prices higher, but only to a point and that point looks to be around US750 cents which is has been around in 2011, 2015 and 2018.
As of early this week, the 28 MPG traded up to US677 cents. It is still only around 0.42 of the 21MPG, so there appears to be further upside in the order of US80-100 cents which is roughly AUD100-150 cents. Then we will see if the US750 cents (give or take a bit) remains the upper limit for the 28 MPG.
Key points
* The 28 MPG is very cheap in relation to broad Merino prices.
* Continued strength in Merino prices looks to be starting to pull the 28 MPG upwards.
* The immediate (next few months) upside potential for the 28 MPG looks to be AUD100-150 cents.
What does this mean?
Crossbred prices have exhibited a lot of volatility in recent years. Given this recent behaviour, the relatively low price in relation to Merino wool for the past 15 months and the continued strength of Merino prices, there looks to be the prospect of the 28 MPG testing it’s US dollar highs of recent years, which is around US750 cents. That indicates the potential for prices rises of AUD100-150 cents for the 28 MPG.
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