Anchoring wool price ideas on last years results

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Talk to a wool broker about the price ideas farmers have in mind for their wool clips and the talk soon zeroes in on how farmers use prices from the previous clip as a guide to what they expect for the new clip. In a market that has not changed much, this works well, which means it does not work very often. This article takes a look at wool price variations between clips.

Where demand and supply are uncertain, markets are used as the mechanism for many buyers and sellers to arrive at price levels which reflect the balance of demand and supply. For greasy wool, the auction market has an extra function of blending farm lots into mill consignments. Hence the constantly varying prices to match this shifting balance.

For the purposes of this article, the monthly average prices of the 19 MPG from 1992 onwards have been used to look at the range of price changes across different timeframes, from one month to 24 months.

In Figure 1 the range of price changes for one, three, six and nine months is shown. The price changes vary from falls greater than 40% to rises greater than 40%. The vertical axis shows the probability of price changes occurring for a given timeframe.

One month changes were all within 5% of the starting price. From the perspective of price expectations, the price one month ago is a reasonable level to uses as a guide. As soon as the timeframe lengths the spread of price changes widens and flattens. For three months only half of the price changes are within 5% of the starting price, for 6 months the proportion falls again to 24% and for nine months it is 18%. Figure 1 shows the spread of prices widening quickly as the timeframe lengthens.

Figure 2 shows a similar analysis for 12 and 24 month timeframes. The vertical axis has been shortened (compared to Figure 1) to better show the detail of the spread of price variation. In contrast Figure 2 shows that the spread of price variation between 12 and 24 months is similar. There is a similar probability, when looking at price changes across 12-24 months, of price changing across a wide range. This means that prices from the previous year are no guide at all to prices for the current year.

What does this mean in practice? For example, the 21 MPG roughly traded between 2000 and 2400 cents from early 2018 to mid-2019. Many price hopes are anchored on this range with a seemingly conservative wish that prices might return to the bottom end of this range, say around 2000 cents. Figure 2 shows that prices from 12 and 24 months ago are no guide to what we can expect, and given the weakness in apparel fibres generally (see last week’s apparel price rank article) it seems unlikely the 200-2400 cents range will be revisited soon.

Article sourced from mecardo.com

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