Rises in wool prices since last spring have been welcome, if somewhat variable. This article takes a look at what factors are behind these changes.
Wool prices tend to trend in line with economic activity in the major world economies, rising when economic growth is improving and declining when economic growth weakens (see article here). Such is the nature of an industrial commodity. Supply tends to take its place as a secondary factor, which certainly is the case when compared to the classic agricultural commodities such as grains and meat. Change in supply plays a big role in the relative price of wool within the greasy market and within the wider apparel fibre market (see article here)
The other factor which influences local greasy wool prices is the exchange rate. Since September, the Australian dollar has fallen by 7% (monthly average prices) against the US dollar. Figure 1 shows a schematic for the average micron (around 18.5 micron) merino MPG price in Australian and US dollar terms. The prices are compared to the spring 2024 low price (set to equal 1.0). The US dollar price is up 8% since September with the Australian dollar price up by 14%, the extra lift due to the exchange rates (another slight variance will be due to the average fibre diameter changing between months). From the perspective of Australian auctions, around half of the average merino price rise seen since September is due to favourable exchange rate moves.
Within the merino clip, there have been quite varying changes in price since September. Figure 2 repeats the format of Figure 1, for the 16.5 MPG (eastern). In US dollar terms, the current (March average to date) price is actually lower than last September by 2%. The lower Australian dollar has managed to save the day, lifting the price by 5%. Continuing on the same theme, Figure 3 looks at the 21 MPG which is up 11% in US dollar terms from September and 19% in Australian dollar terms.
Figure 4 looks at the season-to-date change in supply (AWTA core test volumes) for 22 micron and finer wool (effectively the merino clip). The reason for the quite different price movements in fine and broad merino is obvious. The supply of 21 micron wool is down 27% for the season while the supply of 16 micron and finer wool is up. This is consistent with a merino clip growing during dry seasonal conditions, finer and lower fleece weights. The price for broader merino wool has improved to finer wool.
Figure 4 also shows the supply of 18-19 micron wool to be lower. As the average fibre diameter of the merino clip is around 18.5 micron, this tells us the supply of merino wool in Australia is down for the season to date. The price ratio for merino compared to the major apparel fibres has been at lowish levels (given the general supply of merino wool) during the past 18 months. This ratio has increased from 6.2 to 7 since September, with lower supply helping to push the merino price upward in relation to the major apparel fibres. The bad news in this is recent price rises in merino wool look simply to be a minor realignment in relative prices rather than the start of a cyclical uptrend.
What does it mean?
Change in supply tends to be reflected in changes in relative prices within the greasy wool market and between apparel fibres. To have a rising trend in price requires a different factor, improving economic growth in the major economies. Recent changes in merino (and crossbred) prices can, in the main, be credited to changes in supply and exchange rates. As such the scope for further price rises is limited unless economic growth improves in some or all of China, Europe and the USA.
Key Points
- A lower Australian to US dollar exchange rate since last September has helped local greasy wool prices by 7%
- While the supply of 17 micron and finer wool is up for the season 18 micron and broader volumes are down. This helps explain why broader merino prices have risen by more since the spring.
- The overall lower supply of merino wool has helped push the price ratio for merino up against the major apparel fibres
Click on figure to expand
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: BAE, RBA, AWC, WI, AWEX, PCI Fibres, Emerging Markets, Fibre Year, ICS
