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Mecardo Analysis - Combing wool price cycles

  • By: "Prime" Ag News
  • May 14, 2019

This article is bought to you by Extend Security

By Andrew Woods | Source: AWEX, AWC, BAE, ICS. 

With Merino and crossbred combing prices trading at record nominal levels this season (early in the season for Merino and late in the season for crossbred) we thought it a good idea to look at the strength of these price cycles in terms of their proportional price rises from the previous cyclical lows. Read on to see how strong these cycles have been.

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Studying price levels through time is made more complex by overall inflation and changing commodity values, in the case of fibres the “learning curve” of manmade textiles which have driven the fibre price complex lower during the past seven decades. The outcome is that what constituted a high price in 1969 does not relate to a high price in 2019, in nominal nor real terms. One way around this issue is to look at the variation in price from a recent peak or trough, measuring the “halving and doubling” of commodity prices.

Figure 1 shows three series starting in 1967 and running to this month. The line series is the average Merino micron price in nominal Australian dollar terms (left-hand scale). The two bar series show the rolling variation in price from the lowest price of the previous five seasons (trough to peak) and from the highest price of the previous five seasons (peak to trough) – both shown on the right-hand scale.

The attraction of this cycle analysis is that it provides theoretical targets for cyclical highs (when prices are low) and cyclical lows (when prices are high). It also provides a sense of perspective on the strength of the cycle.

The average Merino micron price reached its recent peak in mid-2018 and has spent the past eight months trading near this peak level. The peak price was around 110% above the cyclical low prices of 2015, so in this sense, the price cycle has been a fairly standard one despite the high nominal price levels. This is a much more sober price cycle than the 1973 cycle (which rose by 300-350%), 1988 (~200%) and 2002-3 (~160%).

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Assuming the market has peaked, the good news is that a standard rising cycle has a good chance of being followed by a standard or moderate down cycle. Following the big 1973 and 1988 cycles, prices fell by 60%, and by around 40% after 2002-3. For the next down cycle, a fall of 20-30% is the likely size of the downturn.

Figure 2 shows the same analysis as Figure 1, for the 28 MPG. As of May, the 28 MPG has just risen by 100% from it’s lowest level of the past five years. While the speed of the price rises has been very quick (since late 2018) the actual cycle strength is a normal one and is less than 1973 (most cycles are), 1976, 1995 and 2002-3. The 28 MPG cycle is more complex as it is also tied into the Merino cycle. Looking forward to the next down cycle, a fall of 20% is the minimum expectation and around 40% the maximum.

2019-05-14 Wool 1 2019-05-14 Wool 2

Key points
   * In terms of price rises, the current Merino price cycle has been a "normal" one, rising by around 100% from the preceding cyclical lows
   * A "normal" cycle would be expected to have a following down cycle where prices fall by 20-30%
   * The rampant 28 MPG has just reached the 100% price rise level on the lowest price of the past five years. It is still slightly lower than most of the previous cycle rises.

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What does this mean?
The average Merino micron price has stuck to the old market saw of “doubling”, with the price this season trading at or near double that of the 2015 cyclical low. Despite the record level of the nominal price, this cycle is a fairly standard one in terms of the size of the price rise. This is good news as the following down cycle has a good chance of being a moderate one, rather than like the big falls seen following 1973, 1988 and 2002-3. The size of the 28 MPG rise is also “normal” although very fast this season.