The Merino wool industry is basking in high prices and has been for a number of years. Mecardo took a look at the effect of supply on the price of wool.
Figure 1 shows the AWTA test volumes for 20-22 micron from 2005-6 through to the current season (which is an estimate). It shows the volumes falling from around 1.2 million bales to around 600,000 bales in recent seasons (a fall of 50%) with another sizeable fall this season.
To look at a price, a price ratio for the 21 MPG to the Cotlook Index has been used. The idea behind this is to account for some general apparel fibre price cycles and movements through the cotton price. The price ratio starts off around 5 and finishes around 9.5, with a strong rising trend. 2011 is an aberration, as the cotton price rose to break the peak level last reached in the American civil war, some 146 years earlier.
A trend in the wool to cotton price ratio can be developed as a guide to dominant changes in wool prices (in relation to other fibres – in this case cotton) during the past 13 years. Figure 2 shows the calculated trend in the wool to cotton price ratio overlaid on the 20-22 micron volumes for that period. As supply has fallen, the price ratio has trended higher, with supply accounting for about 85% of the change in the price ratio.
So, supply has been the dominant factor in the rising value of the 21 MPG in relation to cotton. Here is where some interesting “what if” scenarios can be developed. What if the supply of 20-22 micron wool had remained around 1.2 million bales (with a flock around 90-100 million sheep)?
We can use the trend, which is driven by supply, to adjust the price ratio and through that the 21 MPG for this scenario of an extra 800,000 bales of 20-22 micron wool. Figure 3 shows the actual annual average of the 21 MPG since 2005-6 (with the average to date for the current season) along with a price series adjusted for the change in supply. It shows prices would more likely have been in the 800-900 cents range from 2014 through 2017 and then lifted strongly to trade in the 1400-1500 cents range this season.
This scenario is only theoretical; the supply has gone and is unlikely to return, so the trend price effect is likely to stay. The point is, before the wool industry gets all self-congratulatory about demand creation and the like, it needs to understand how a lot of the current high prices have been won – by shrinking the supply, therefore, the industry.