Wool prices have performed well during the past year, rising from low levels. The question, as usual, is how much of this rise is structural (sustainable) and how much is due to John Maynard Keyne’s “animal spirits”. With this in mind this article looks at volume and price for broader merino wool.
One of the minor issues in the wool market is the use of subjective descriptions for micron categories, which vary across different markets and regions (See British Wool Article here). In this article broad merino is used to describe Australian merino production for the 20-22 micron categories, noting the 23 micron category has become a crossbred category by volume (around 90%).
In June, Mecardo looked at changes in the merino clip during the past 30 years (article available here). The defining change has been the fall in broader merino production. Figure 1 shows the annual volume of 2022 micron wool sold at auction (right hand axis) in Australia and the deflated average gross price for 20-22 micron wool received at auction (left hand axis) in nominal US c/kg. The US dollar price is used as we want to look at the story of change in the wool price without the distortion of the Australian dollar. There is rising trend in the real price for 20-22 micron wool (albeit with significant variation above and below) while the supply has a clear downward trend.
What about synthetic fibres? In this article a weighted average price for oil based and cellulosic fibres is used. This series is shown in Figure 2 (deflated US dollar terms) It has a downward trend with significant variations higher and lower. That downward trend in synthetic fibre prices is a constant drag on apparel fibre prices generally.
While synthetic fibre prices have a downward trend, the 20-22 micron average price has a rising trend. One obvious reason for the different trends is production, namely the falling supply of 20-22 micron wool, down by 80-85% since the late 1990s. As Figure 2 shows, while the synthetic price has a downward trend it does vary around the trend which is something that needs to be considered. Figure 3 uses the price ratio of the 20-22 micron wool price to the synthetic price series in place of the wool price alone, and compares this to the supply of 20-22 micron wool sold at auction (horizontal axis). A log trend is fitted to the graph which explains most the rise in the price ratio. As volume falls, the price ratio rises. The log trend tells us that it is the proportional fall in volume which correlated bets to the rise in price ratio. This means a fall in volume from 200 to 100 mkg is equivalent to a fall from 100 to 50 mkg (both changes are resulting in the volume falling by half) for the price ratio, which increases by 2.4. Now as the volume falls from 50 to 25 mkg the trend price ratio will rise by 2.4 again.
In Figure 4 the deflated 20-22 micron price is compared to the trend model price (developed from the fitted trend line shown in Figure 3) with the shaded region a one standard deviation either side of the trend model price. As Figure 3 shows this simple model is not perfect by any means, but it does show the usefulness of taking volume into account when considering price. By this method where is the structural (sustainable price) for 20-22 micron wool? Somewhere between 10% and 25% below July 2026 averages.
What does it mean?
The trend price ratio to synthetic fibre prices is a moving target, depending largely on the supply of 20-22 micron wool. Further work needs to be done to bring the supply from other southern hemisphere exporters into the calculations, as the mills of the world source from many geographic regions. Unsurprisingly the simple price model shown in this article suggests the current 20-22 micron average price is above trend levels, and is likely to lose some of current prices although this scenario will be sensitive to Australian production levels.
Key Points
- Change in volume explains 80% of the increase in 20-22 micron price ratio to synthetics during the past three decades.
- Based on synthetic fibre prices and the volume of 20-22 micron wool last season, the model trend price for 20-22 micron wool is 10% to 25% below July (to date) average levels.
- This price model is a simple one and history shows the actual price can spend extended periods above and below it.
Click on figure to expand
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: AWEX, RBA, AWTA, Emerging Textiles, The Fibre Year, ICS, Mecardo
