Mecardo Analysis - Cardings – the cycle turns
- By: "Farm Tender" News
- Ag Tech News
- Nov 13, 2018
- 509 views
- Share
By Andrew Woods | Source: BAE, AWC, WI, AWEX, RBA, PCI Wood Mackenzie, Cotlook, ICS.
The Merino Cardings indicator has fallen by around 500 cents or one third since August. It has been an abrupt change in sentiment for a segment of the greasy wool market which has traded strongly, at high levels for five years. This article takes a long term look at the cardings indicator and its relationship to cotton.
Figure 1 shows the Merino Cardings indicator in deflated Australian dollar terms from the mid-1960s to this month. The 1973 spike in price stands out as the maximum price level reached during the past fifty years, in deflated terms. The price had been depressed beforehand, in the early 1970s. Following the collapse of the Reserve Price Scheme (RPS) in 1990-1991, the price level for the Merino Cardings indicator tracked along between 400 and 1000 cents until 2015. The price rose from 2015 onwards, reaching levels last seen in the dying days of the RPS during the past year. In a little over two months the price has dropped like a stone, returning as of last week to a little over 1000 cents, which is still above the level of the 1991-2014 period.
The challenge is always to put price series in some perspective, looking at its performance relative to other related series. In this article cotton, the biggest natural fibre by volume used in knitwear, provides the perspective. Figure 2 shows the Cotlook Index in deflated Australian dollar terms for the same period as Figure 1. 1973 was also the peak price level for cotton in deflated Australian dollar terms for the past 50 years, with 1976 close behind. Beyond that, the trend in deflated cotton price is quite different to Merino Cardings. The cotton price level trends steadily lower from the 1970s through to around 2004, when the price looks to stabilise. The 2011 peak in price stands out as it lifted the deflated value of cotton back to mid-1980 levels very briefly.
Figure 3 shows the price ratio of the Merino Cardings indicator to the cotton price series from 1966 to this month. 1973 stands out, with merino cardings very briefly rising to five times the cotton price. The late 1980s also stand out with the price ratio rising to four and staying there for the best part of a year. Otherwise in the thirty years to 2001, merino cardings tended to trade between one and two times the cotton price. After the liquidation of the Australian stockpile in 2001, the price ratio jumped into the range between two and four times cotton.
In mid-2014 Merino Cardings rose above the four times price ratio, spending the next four years trading a 4.5 to 6 times the cotton price, above the phenomenal 1973 peak. The question has been whether structural changes to demand have pushed the merino cardings price ratio higher, or cyclical fashion factors were behind the increase. It is looking like cyclical factors pushed the price ratio higher, and this cycle has turned.
Key points
* Merino cardings have traded at high levels for the past five years.
* The cardings price has been high in relation to combing wool and other major fibres such as cotton.
* The factors which pushed the cardings to cotton price ratio to high levels looked to have changed and therefore were cyclical.
What does this mean?
After a great run merino cardings prices appear to be returning to lower pre-2014 price levels relative to other fibres (including merino combing wool). The immediate implication of this is that the price levels of recent years for crutchings, locks, carding stains and other short staple wool types will not be a good guide to price levels in the next few years. The medium term implication is that discounts for staple length will start to widen (although lower supply for medium and broad merino wool will slow this process) and so will discounts for low staple strength.
Share Ag News Via