Merino wool price cycles

Just as high commodity prices do not last forever, neither do low prices. As the old saying goes, commodity prices like to halve and double through time. Wool prices certainly follow this pattern, if not in regular cycles, certainly in terms of halving and doubling. So, too, do the meat markets. Mecardo looked at the magnitude and frequency of peak-to-trough falls in beef, lamb, and merino prices in September 2023 (See here)

Figure 1 shows the nominal average micron merino fleece price (think an MPG that changes its micron through time to match the average micron of the merino flock of the time) for the past 60 years. For reference, the Merino clip is averaging around 18.5 micron at present. Inflation drives the nominal value higher, so Figure 2 shows the same series adjusted for inflation, set to 2024 value. This article is interested in looking at the variation in the Merino price from peak levels (peak to trough) and from low levels (trough to peak), in this case, using a four-year lookback period.

Figure 3 shows the change in the Merino price from the lowest level of the preceding four years, with the bars showing the nominal change and the line showing the deflated change. The two series are very similar, although the deflated series brings the trough to peak rises marginally closer to averaging a rise of 100% (the doubling of price). In these terms, the 2002 post-stockpile cycle was on par with the 1988 boom price. 1973 stands out, as usual, as an extraordinary price cycle where prices lifted by 300-350% from the depressed levels of 1971 (when sheep were referred to as ground lice).

Figure 4 shows the peak-to-trough falls in the Merino prices in nominal and deflated terms. The big downturns in the mid-1970s and early 1990s were in the order of 60-70%. The 2020 pandemic downturn, thankfully, did not match these and was brief. Standard downturns are in the order of 30-40%, with the current Merino price sitting around 30%, the highest level of the past four years.

How does this help when considering forward prices for the next two or three years? The Merino price fell to an average of 1383 last August, so let us use a base price of 1400 cents, assuming this is the cycle low. Looking forward two to three years, it seems reasonable to expect a rising cycle, and rising cycles tend to result in prices rising by 100% from the cycle low. In practical terms, few wool growers get the full price rise by selling at the peak. How many wool growers have you met sold at the peak in March 1951 or March 1973? A 50% rise from the cycle low seems a far more reasonable expectation. If you can extend that price across two to three years as an average, then a multi-year forward price starts to look attractive.