Mecardo last looked at the extent of rising price cycles in 2018, when prices were high for all qualities of wool. Given the rapid change in wool prices this season it is time to look at the recent price rises and how they stack up against history.
Geo-politics and economics are dominating the news at present, with higher oil prices leading to higher prices for anything manufactured from oil such as plastics and oil based apparel fibres, and ultimately slower economic growth. This crisis has only been in place since late February, and has yet to impact the wool market. If the crisis continues it will sow the seeds for the next downturn in prices. For the time being, back to the rising merino wool price.
One of the frustrating issues when using deflators to adjust for inflation (bringing past prices up to current level values) is that deflators continue to be adjusted as we progress through time and add more data. This means that deflated values for a particular, the 1973 peak for example, changes as deflators are updated. So, if you look back at the 2018 article and see discrepancies between peak price levels, this is the cause.
In this article a deflated US dollar price series for merino (or more accurately an indicator price adjusted to the average merino fibre diameter) form the mid-1960s to this month is used. It is shown in Figure 1 with cyclcial high (black squares) and low points (red circles) identified, until the 2024 low point.
Table 1 is a summary of the cyclical peaks (black squares) shown in Figure 1. It shows the month of peak price, the monthly average price, the size of the price change from the previous cyclical low (in the case of 1973 4.17 means the price rose by 417%) and the time taken in months to go from the previous cyclical low to the cyclical peak. The median change in price from low to peak is 0.87 (a rise of 87%), however there are a few small cycles from the peak RPS decade from the mid-1970s onwards. From 1988 onwards the median cyclical rise is 1.05 (a 105% rise in price or near doubling of price) taking nearly 2 years at 23 months.
The current market is up by 79% in nominal US dollar terms from the low point of August 2024, a period of some 20 months. At this stage, the price rise this season (and last) is slightly below the median with another 20% of the mid-2024 price to rise and another 3 months to run, in order to match the median cycle since 1988. There is no rule saying the cycle has to match the median pattern of the past forty years, but the comparison tells us that the current cycle is running along normal lines.
What does it mean?
The median price cycle of the past four decades tells us there is room for further price rises in the merino wool market in the near term (next couple of months). Past mid-2026, the cycle will start to grow old and the potential impact of the Middle East war and shipping blockades will increase.
Key Points
- The current rise in the merino price in US dollar terms, from lows in mid-2024, is close to the median rise of the past 40 years and terms of price rise and length of time spent rising.
- There is room for further price rises in the next two to three months before the cycle matches the median pattern.
- The geopolitical backdrop to the market is not normal, and is having a decidedly negative impact on the macro economic backdrop to the market
Click on figure to expand
Click on figure to expand
Data sources: BAE, AWC, WI, AWEX, RBA, ICS, Mecardo
