The down cycle in Merino wool prices so far

Apparel fibre prices peaked in mid-2018 and then began a cyclical downturn well before COVID-19 appeared. By late 2019 the average Merino micron price was down by 29-30% in both AUD and USD terms, a modest down cycle over 18 months. Then came the pandemic. This article takes a look at the current state of the down cycle.

Wool prices tend to fall by around 35% (give or take 10%) in the first 12-18 months of a down cycle. This average pattern puts the 2018-2019 fall in prices well within the norm. With lockdowns occurring in the major economies (which happen to be major markets for wool) the supply chain was thrown into a state of extreme uncertainty, perhaps a state of radical uncertainty as John Kay and Mervyn King have put in their recent book of the same name. As a consequence, demand along the wool supply chain fell by as much as 80% by some estimates, with greasy wool prices tumbling as a consequence.

Since January the price of Merino has fallen by 27% in US dollar terms and 23% in Australian dollar terms (monthly averages). The pandemic downturn is a separate and additional downturn to the already existing down cycle from 2018. If this view holds true then the wool market has another year of the new down cycle to run, into early 2021.

Figure 1 shows the average Merino micron (AMM) price in US dollar terms from 1965 to this month. Figure 2 takes the prices in Figure 1 and compares them to the highest price of the preceding five years. It shows the depth of down cycles during the past 50 years, using a five year lookback. The down cycle in the 1990s was the deepest down cycle (falling by 70%) as the wool market struggled with the disappearance of the USSR demand, a huge stockpile and rolling recessions in major economies.

The post-1973 fall was also a deep one, limited by a reserve price scheme. From the late 1990s, the standard down cycle in US dollar terms has been a 50% fall, which the current market is close to achieving again. In a normal down cycle, it would be time to start thinking about reasons for a base to appear in the price but the uncertainty about demand remains very high, with seasonal deadlines for new apparel ranges for the 2020-2021 season approaching.

Figure 3 shows the average Merino micron price in Australian dollar terms from 1965 and Figure 4 shows the peak to trough fall with a five year lookback (as for Figure 2 but in AUD terms this time). Figure 4 shows a similar story to Figure 3, although recent down cycles have been milder in Australian dollar terms.

Commodity Conversations

What does it mean?

Currently, a common question to nearly any economic commentator is “what is likely to happen?”. It is a reasonable question, but the circumstances of the pandemic and the consequent locks downs are such that there is little historical experience to draw on. At this stage, it seems likely that wool prices will continue in a cyclical downturn through to early 2021. What that means exactly for prices is unclear except that a strong, sustained recovery is very unlikely.

Have any questions or comments?

We love to hear from you!

Key Points

  • The current fall in Merino price since 2018 is on par with recent down cycles, using a five year look back period in both AUD and USD terms.
  • The difference with this cycle is that a pre-existing down cycle which started in 2018 has had a fresh down cycle (due to the pandemic) tacked onto it.
  • The pandemic down cycle will extend the length of time apparel fibre prices languish and it also introduces a high degree of uncertainty to demand hence prices in the coming year.

Click on graph to expand

Click on graph to expand

Click on graph to expand

Click on graph to expand

Data sources: BAE, AWC, WI, AWEX, RBA, ICS 

Make decisions with confidence- ask about our board packs, bespoke forecasting and risk management services
Wool spread by hand
Wool

Wools run comes to an end

After 3 consecutive weeks of price increases the wool market retraced this week, with all types and all centres impacted. After lifting by 30¢ last

Read More »
Muddy sheep
Wool

Rainfall and micron

Seasonal conditions drive changes in the quality of wool, which is a challenge for the supply chain – linking up agricultural supply with all its

Read More »
Cotton
Wool

Apparel fibre prices

It is five months since Mecardo looked at the apparel fibre backdrop to the greasy wool market. It seems timely to check what is going

Read More »

Don’t have an account with us? Join free.

You can have full premium access to all of our content with a monthly or annual subscription. 

Alternatively, create a free account to access our Insights blog and two free premium article a month!

Independent analysis and outlook for wool, livestock and grain markets delivered to you as it’s published

Commodity conversations podcast cover image, a illustration of a sheep standing on a cow's back with grain either side
Listen to the podcast

Join the Mecardo team for the Commodity Conversations podcast, where we provide short weekly market recaps and longer conversations with guests to discuss the drivers and trends in livestock, grain and fibre markets.

Photo of a farmer surrounded by Merino sheep in dusty yards
Research: Analysis of the Australian sheep flock

In this report for LiveCorp and MLA, we analysed the historical trends in the demographics of the Australian sheep flock, examining domestic factors that influence farm-level enterprise decision making. 

Image of harvested grain pouring into a chaser bin
SERVICES AND CAPABILITIES STATEMENT BROCHURE

We don’t just bring you the most up to date market insights. Find out more about Mecardo’s services including risk management advisory, modelling, benchmarking, research & consultancy.