Price volatility in Australian farm commodity prices

A comment from a journalist this week has prompted this article. The comment in the form of a question asked why wool prices were so volatile, in relation to other commodities. The wool industry does tend to beat itself up about price volatility, so this article compares merino wool price volatility to some other common Australian farm commodity prices.

Two articles last week looked at wool and apparel fibre price volatility. An explanation of the method used to define price volatility was given in the first of the two articles. This method has been used again in this article – basically looking at the month to month price variation over a rolling 12 month period.

In Figure 1 the price volatility is shown for merino wool, a NSW saleyard trade steer price series and a wheat price series from the USA (in Australian dollar terms) from 1980 onwards. The US wheat price series is used as there are no meaningful Australian series available for the 1980s due to the single desk selling of the old AWB. The merino price volatility is extremely low in the first half of the 1980s and then rises to high levels in the latter part of the 1980s into the early 1990s, when the Reserve Price Scheme (RPS) collapsed. Note the high level of price volatility in the trade steer price in the 1980s, after which it has settled down to be on par with the merino price volatility. The US wheat price series has relatively low-price volatility in the 1980s, in the 1990s is on par with wool and beef and since 2000 has generally been the most volatile.

Figure 2 compares price volatility between merino wool, ASW wheat and canola since the early 1990s. The wheat and canola series are Australian so they capture all of the effect on price due to local basis. The collapse of the RPS shows up early in the schematic through high merino wool price volatility. The merino price volatility then settles into a lower range, kicking up generally when price falls after a major peak in 2003, 2011 and 2019/2020. Now look at the wheat price volatility, it is generally higher through the past three decades. The canola price volatility is more in line with the merino volatility, sometimes being higher and sometimes lower.

Finally in Figure 3 the price volatility for merino wool is compared to mutton and trade lamb (both NSW saleyard price series) from 1991 onwards. Mutton stands out as the most volatile series in this comparison, although it has settled down in recent years.  The trade lamb price volatility is also consistently higher than the merino wool price volatility.

Using the definition of price volatility employed in this series of articles the merino wool price has been if anything less volatile during the past three decades than companion commodities. Perhaps the definition is not quite right. In Table 1 a rough count is made of the peak to trough (view earlier article on this topic) down cycles suffered by commodity since the 1990s, with the size of the fall (from the highest price in the preceding five years) shown. Lamb has had the best run with only three down cycles of approximately 50% (the price fell from the previous peak by half). The other commodities (wheat, merino wool and beef) have each had five down cycles of varying magnitude with the trade steer series having the mildest downturns.

While Table 1 gives a slightly different view of price volatility it still shows that the merino price volatility is not extraordinary by any means.

What does it mean?

The wool industry is entitled to feel somewhat bruised after the fall in prices suffered in 2019 and then again in 2020 as the combined downturns have resulted in a major down cycle. However a look at price volatility since the mid-1990s shows that wool prices have had a similar number of down cycles to wheat and beef, on par in severity to wheat.

Even lamb, which boomed on the back of declining international supply, has had two major down cycles in the order of 50%. Price volatility is part and parcel of the commodity game. It if is a major issue at the farm level there are ways to reduce it, however the lack of take up in risk management tools points to a limited appetite from Australian farmers.

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Key Points

  • Price volatility for merino wool is not extraordinary in relation to its companion commodities.
  • Lamb, beef and wheat have endured cyclical down cycles during the past 25 years.
  • Perhaps price volatility is not a critical issue for extensive farms in Australia with good levels of equity.

Click on figure to expand

Click on figure to expand

Click on figure to expand

Data sources: AWC, WI, AWEX, IMF, RBA, MLA, Australian Wheat Forecasters, Profarmer, ICS, Mecardo. 

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