The Eastern Market Indicator (EMI) is the default price series used for the Australian greasy wool market, as it is well known and has a history extending back to the 1980s. Change in the Australian flock structure has meant that the relevance of the EMI to the merino clip has progressively declined in recent decades. This article looks at this topic.
AWEX, the Australian Wool Exchange, is the official reporter
of the Australian greasy wool market and the Eastern Market Indicator (EMI) the
peak indicator designed to reflect movements in the general market. The makeup
of the EMI is provided on their website (read
more here). Indicators such as the EMI are subject to occasional review by
AWEX, as the makeup is adjusted to match changes in the market structure.
Figure 1 shows seasonal average prices for the EMI, adjusted
for inflation, and also the average season price for all wool sold at auction.
The bars in Figure 1 show the ratio of the average price (of all wool sold at
auction) to the EMI. The EMI generally does a good job in showing the level and
movement in the overall average price of the Australian greasy wool market. The
ratio of the all in average price to the EMI has been trending higher since the
1990s, rising from 85-90% to be now around 100% (plus or minus 2-3%).
Looking at the weights of merino fleece micron used in the
current EMI calculations, quotes broader than 18.5 micron (the average merino
fibre diameter) are twice that used for 18.5 micron and finer. Arguably the EMI
needs to be reweighted to match the market structure of recent seasons. The
skew of the broader side of 18.5 micron helps explain why the all in market
average price ratio to the EMI has continued to rise – there is more fine
merino wool in the all market average than in the EMI.
Figure 2 shows the deflated EMI and the deflated all merino
average price from the mid-1990s to the current season (to date), with the
ratio of the all in merino average to the EMI shown by bars in the schematic.
Since the 1990s the ratio of the merino average to the EMI has steadily risen
from around 90-95% to 116-118% in recent seasons.
There are three main causes for this increase in the merino
price ratio to the EMI.
1.
Since the 1990s the proportion of merino wool in
the Australian clip has fallen from around 95% to 77%, so the EMI has had to
accommodate the increased proportion of crossbred wool in the clip. (read
more here)
2.
The average fibre diameter of the merino clip
has decreased from 21 to 18.5 micron which along with a decreased volume has
helped boost the merino price. (read
more here)
3.
The discounts for the staple length and staple
strength have decreased which has improved the average price in relation to the
standard fleece price.
The cumulative outcome of these structural changes means
that the EMI has progressively become a poorer guide for merino prices. Table 1
provides the seasonal average, deflated prices series shown in the two
schematics of this article.
What does it mean?
For anyone using the EMI as a proxy for wool value in merino production, the growing gap between the average merino price and the EMI is reducing its suitability. The average merino price now tends to be 200 cents clean above the EMI. There is an argument for a separate merino price series to be produced, at least annually (with back history),so that an alternative and potentially more accurate view of merino wool prices is available.
Key Points
- The EMI is designed to reflect the general (average) price for wool sold at Australian greasy wool auctions and it does that reasonably well.
- With the changing structure of the wool clip, the relevance of the EMI to the average merino price has weakened, with the gap between the two series growing.
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: AWEX, RBA, ICS, Mecardo
