The life seen in greasy wool prices this season has been underpinned by consistent pressure in recent years from falling supply. In this article, we take a look at where that is most obvious – in the broader merino micron categories.
Agricultural market commentary often discusses price movements without due reference to changes in supply and the impact this has. A couple of examples are the crash in fine merino prices in the 2000s as supply rose strongly (see more here), and the rise in lamb prices since 2000 as the supply of sheep meat has fallen in the import/export nations (see article here).
The Australian supply of 20–22 micron wool has declined by 80% during the past three decades; therefore supply is expected to have some effect on price. Mecardo last looked at broad merino prices and supply in October 2024 (see article here), so it is not a new topic, but given the recent price volatility (on the rise this time), it is worth revisiting.
Figure 1 shows the Australian auction sales volume of 20–22 micron wool (bars) and an inflation-adjusted (deflated) price series for 20–22 micron wool (all in) sold at auction. This price series used is lower than the comparable indicator (AWEX MPG) series because it includes all grades of 20–22 micron (including fine crossbred) wool sold at auction. In practice, this all-in price will vary between 90% and 95% of the comparable AWEX MPG price level. The volume data should include the other major merino producers in the world, but that is easier wished than done.
Figure 2 replaces the price series with a price ratio of the 20–22 micron to a non-wool staple fibre (NWSF) price series, an attempt to strip general apparel fibre price fluctuations from the wool price. Two trends are clear. As supply trends lower, the price ratio trends higher, albeit with volatility along the way. Figure 3 is a simple linear regression of the two series shown in Figure 2. This regression shows that around two-thirds of the change in the price ratio is correlated with the drop in volume.
Figure 4 takes the trend calculated in Figure 3 and calculates a model price series for the 20–22 micron average, effectively based on supply and the expected price ratio. It is not a perfect model by any measure, but it does flag periods when the wool price looks to be over- or undervalued. In recent years, the model indicated 20–22 micron prices to be consistently undervalued.
In the current season, to the end of August the actual price was 10% below the model price. With September-to-date prices added, the average 20–22 micron price (1407 cents clean – as shown in Figure 4) is close to the model price (1448 cents clean), which, by using the season-to-date basis of 92% translates into a 21 MPG around 1574 cents.
What does it mean?
From a supply/general apparel fibre price perspective, the broader merino market at last appears to be moving up to “fair value” levels. The extended period of below “fair value” prices of recent years will continue to play out in the market in the form of lower prices through 2026.
Key Points
- The 20-22 micron price, which has been underperforming this simple model price for five seasons, finally appears to be getting back into a “fair value” position.
- Supply seems likely (in Australia at least) to remain under downward pressure in the coming year, so the “fair value” model price will not be falling anytime soon.
Click on figure to expand
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: AWEX, RBA, Emerging Textiles, Fibre Year, ICS, Mecardo
