In earlier articles, the difference in price between the 20 MPG and the Merino Carding indicator was used to flag times of little downside risk for the 20 MPG (read here). This occurs when the gap is small, typically below 250 cents (clean). In a similar vein, this article looks at the 19 MPG and its relationship to an average non-MPG wool type 19 micron price.
AWEX MPGs are constructed using fleece prices which makes sense as they account for the bulk of the value in the greasy wool market. The quotes used by AWEX avoid faulty wool types and by definition carding types. For the 19-micron category non-faulty (no subjective fault), low VM (less than 2%) fleece with a staple strength of 35 N/ktx and greater and a staple length between 67 and 95 mm accounts for between 20% and 50% (averaging 36% since 2000) of all 19-micron wool sold on a clean basis. The proportion of good fleece wool sold depends on seasonal conditions.
Figure 1 shows the Eastern 19 MPG (weekly) from mid-2003 to last week in Australian cents per kg, as well as the average price for non-MPG type wool (wool which does not fit the description outlined in the preceding paragraph). The description provided does not exactly match the AWEX MPG construction but will be close enough for this analysis. The two series follow each other with some variance in the difference in price.
Figure 2 shows the 19 MPG for the same period as well as the difference in price between the 19 MPG and the non-MPG 19-micron series (smoothed by a 6-week moving average) which was shown in Figure 1. As with the 20-micron comb-card basis, when the 19 MPG-non MPG basis shrinks to narrow levels in Australian cents per kg terms it flags minimal downside risk for the 19 MPG. A horizontal line is overlaid on Figure 2 at 180 cents basis to highlight when the basis is low. It is not a perfect indicator but is generally a good one. Unfortunately, it does not work for the reverse, when the basis is large.
The current basis between the 19 MPG and 19-micron non-MPG wool is still around 280 cents, so from the perspective of this indicator, the 19 MPG still has downside risk.
What does it mean?
A common human reaction to falls in market prices is to think it is a short-term aberration, which it might be. However, it is nice to have some objective evidence to support such views. In the current market price compression has not yet reached a point where we can say with any confidence that fleece prices have little downside risk (risk of falling further). That has clear implications for selling wool, and even more, if you are considering holding wool.
- When prices compress enough in the greasy wool market, within micron categories, they flag low risk of price falls for the fleece types.
- This price compression can be measured through the difference between combing and cardings types and MPG and non-MPG types.
- Prices in the greasy wool market are not yet compressed enough to send such a signal.
Click on figure to expand
Click on figure to expand
Data sources: AWEX, ICS, Mecardo