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It is a truism to state that price is a function of supply and demand. With this truism, the difficulty for primary commodity producers is assessing demand. On a positive note, we can monitor supply, which can help to highlight changes to market price levels and market price structures. In this article, we take a look at the Australian merino wool supply and its relationship with price relativities to apparel fibres generally.

Australia accounts for around three-quarters of merino wool production, with the other quarter coming mainly from South Africa, New Zealand and South America. The Iberian Peninsula still has merinos, although half of the Portuguese merino flock is black. Apologies to the other regions of significant merino production but for ease of data access this article uses only Australian merino production. It is worthy of a separate article to develop a southern hemisphere merino volume time series.

The merino proportion in the Australian clip fell from the early 1990s, as the collapse of the Reserve Price Scheme (and the disappearance of demand out of the USSR) played out. Sheep numbers fell (in all southern hemisphere apparel wool growing countries) and the proportion of merino wool in the Australian clip decreased.

Figure 1 shows that the merino component of the Australian wool clip reached its high point in the early to mid-1990s (over 90%), which was well up on the early 1980s level which was around 70%. The merino proportion steadied around 2011-2012 at 80% (give or take). In the past couple of seasons, the merino proportion looks to be easing, although it is not clear yet whether this is a permanent change. The current level is still well above that of the early 1980s.

Figure 2 shows the Australian merino wool supply (calculated by adjusting the clean AWTA core test with the proportion of merino wool sold at auction) from 1999-2000 onwards. The supply steadied around 2010-2012, with the eastern 2017-2019 drought pushing volumes downwards, from which supply has recovered somewhat.

In Figure 3 the volumes shown in Figure 2 are compared with a price ratio for the average merino micron to a non-wool staple fibre price series (NWSF) for the period from 2000 to last season. The 2010-11 season has been omitted as the runaway cotton price in 2011 pushed the price level down to low levels. Figure 3 shows us the impact which supply has on the price of merino relative to the major staple fibres (cotton, polyester, acyclic and viscose). The general rule is the lower the merino supply the higher the price ratio. This rule fits with wool prices generally following the lead of the apparel fibre markets, while factors specific to wool cause adjustments to the price relativities.

In the past 24 years, the trend price ratio for the average merino micron price has risen from three to somewhere in the range of six to eight (depending on supply). A part of that rise has been the reduction in the average fibre diameter of the merino. In January Mecardo looked at 21 micron, which had a similar relationship between supply and price relativities. For 17 micron there is a relationship between volume and the excess price ratio to NWSF above that of the 21 MPG, which means that as the volume of fine merino wool has increased, its part of the price ratio to the NWSF has shrunk. This raises the prospect that in the longer run the price ratio for the bulk of the merino clip to NWSF depends in large part on changes in the volume of the broader merino categories.

What does it mean?

The increase in price ratios for merino wool over the past two decades are based primarily on lower supply, mainly of the broader merino categories. As such they are more or less permanent (within the scope of natural variation), subject to changes in production in the broader merino micron categories.

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Key Points

  • Lower supply of the broader micron categories has played a key role in lifting the price ratios for merino wool compared to the major staple fibres.
  • Changes to the broader merino micron category volumes depend on a wider range of production

Click on figure to expand

Click on figure to expand

Click on figure to expand

Data sources: AWC, WI, NCWSB, AWEX, Fibre Year, Emerging Textiles, AWTA, ICS , Mecardo

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