The down cycle in Merino wool prices so far

Wool on floor

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.

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.

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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 

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