When wool prices fall there are always questions as to why this has happened, less so than when they rise. With merino prices falling, and even crossbred prices being squeezed lower, such questions are being asked again. This article has a look at price movements so far this season for the 19 MPG and the forces likely to push prices around in coming quarters.
Mecardo has looked at seasonal prices patterns in earlier articles. In July 2021 the seasonal price pattern for the 19 MPG was looked at, showing prices tended to weaken in the spring. Last month Mecardo looked at the seasonal pattern of supply, showing how the spring peak in supply has weakened during the past two decades. From a supply perspective the downward pressure on price has eased in recent decades, however there is a demand component to the cyclic spring weakness in prices as well.
Figure 1 shows the median seasonal price pattern for the eastern 19 MPG (for the past five seasons) in both Australian and US dollar terms. The seasonal pattern tends to reach a low around now, rising to a peak early in the new calendar year. Price tends to weaken from the May/June period to October, which fits neatly with the price pattern seen this and last season.
In Figure 2 the weekly closing prices for the eastern 19 MPG for the first 13 weeks of this season and last season are shown. The price changes for 2022 match those seen in 2021. Figure 1 implies that, without any other influence, that prices should have a good chance of picking up through to early 2023.
Unfortunately for the wool market there are other influences in operation. Figure 3 compares the 19 MPG (in Australian dollar terms) and the Ifo Institute business expectations for German manufacturing from 2001 through to this month. The Ifo expectations index has been lagged by six months, as it is a forward looking indicator giving some insight into the near future. The German economy is of interest to wool as it is the largest in Europe, an important market for wool, and is intimately tied into other major economies as it is a major exporter.
The business expectations index shown in Figure 3 does not always correlate with the 19 MPG. However there have been two strong downturns in the index in 2009 and 2020, with another severe downturn in the process of unfolding. The 2009 downturn resulted in the 19 MPG falling by 30% and in 2020 by 50%, so the odds are this current down cycle (down 16% since June) in wool prices has some way to run yet, perhaps softened in the next couple of quarters by a positive seasonal price pattern.
What does it mean?
Seasonal price patterns suggest merino prices should steady in the coming month, but the deteriorating economic backdrop to the market, as evidenced by the Ifo manufacturing business expectations index shows that a strong re-bound into early 2023 is unlikely.
Key Points
- Merino prices tend to weaken from the middle of the calendar year through to October. Price weakness this season fits this pattern.
- The seasonal price pattern shows prices firm from October to early in the new calendar year.
- Unfortunately the economic backdrop to the market is showing similarities to 2009 and 2020, periods of strong cyclical down cycles.
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: Ifo Institute, AWEX, RBA, ICS
