With the rise in wool prices in the past month, a logical question is how much of the rise is due to improved demand and how much is due to restricted supply? This article takes a look at the economic backdrop to the market, in effect, the demand side of the market.
Wool production has been shrinking in recent years (see more here) with this trend continuing this season (see more here), which, in conjunction with weak demand (the Ifo Institute – see more here) says the German economy has been in recession for the past two years, has seen reported wool stocks along the supply chain reduced to minimal levels. This situation sets the supply chain up for price volatility when demand picks up.
The Ifo German Manufacturing Index, shown in Figure 1, improved from late 2024 through to the autumn before it steadied. The 7% improvement in the merino price from late 2024 to the autumn matched this increase in the Ifo indicator. Since the autumn, the merino price in US dollar terms has risen by 31% (monthly average prices), which is better than was expected from the Ifo index, although the service sector in the German economy is reported to be performing more strongly than manufacturing. On a positive note, the Ifo Institute is predicting the German economy to expand during the next two years, which would be good for wool demand.
What about China, which is often credited with absorbing half of the Australian wool clip? If this is correct, what happened to world wool demand excluding China during the past three decades? Figure 2 compares the change in Chinese GDP to the change in the US dollar merino price. The correlation between the two series is patchy. There are legitimate concerns about the accuracy of the Chinese GDP estimates, and there is also the structural issue that a single number cannot reflect all of the facets of a big, complex economy.
Figure 3 compares the year-on-year change in the US 5-year bond yield (inverted), advanced by 18 months and the merino price in US dollar terms. This measure provides some forecasting of the trend we can expect for demand, hence wool prices. The change in bond yield jumps around, with a rising trend continuing to point to a generally positive influence on demand through to autumn 2026. From this perspective, a rise in wool prices fits the expected pattern
What does it mean?
The US bond market is proving to be a good indicator of the trend in wool prices, providing some forecast ability, indicating firmer demand for wool through to autumn 2026. European data, such as German Ifo indices, provide a view on economic growth and, through that, wool demand with negligible forecasting ability. The Ifo Institute’s view of the German economy during the next two years is supportive for wool prices. Not a lot can be gleaned from Chinese GDP numbers.
Key Points
- The Ifo German Manufacturing Index has not matched recent rises in wool prices, but expectations for an expanding German economy in the next couple of years are very positive for the outlook for wool prices.
- The Chinese GDP has a patchy correlation to wool prices.
- The US bond market continues to point to improved wool prices through to autumn 2026.
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: Ifo Institute, RBA, AWEX, US Federal Reserve, World Bank, ICS Mecardo.
