Don Ohsman's view from America

China expanded its role as the largest consumer of hides and their government announcement of vat/customs duties was the initial rationale for higher prices in hides and leather.

Benchmark heavy Texas steers sold during the first week of January 2006 at $63 and heavy native steers traded at $65.50. Typical branded cows sold at $40 and $41 and dairies, as always, depending on average and origin between $46 and $47.

In December of 2005, the Chinese government announced that effective January 1, 2006, handbooks used by importers in the country to import in raw hides would not be renewed once their capacity had been utilised. There were also time constraints placed on receipt of hides under the system.

Furthermore, enforcement of the previous system that had been comparatively lax would no longer be so. This led many buyers in China and also Taiwan and Korea, who had been using China as their beamhouse, to step up their buying activity.

Packers meanwhile, seeing a significant increase in the volume of bids, refused to sell unless advances were obtained, thus forcing buyers to meet their price demands. By mid January heavy Texas had advanced $1-$1.50 bringing up values of heavy natives, butt and branded steers in a similar fashion.

By the end of January, Texas were at $66-$66.50 and producers, who wanted to capture all of the higher priced orders they could, had sold themselves three and four months forward compared to three to six weeks that used to be the norm.

Another phenomenon that occurred in January and lasted through much of the year was the irrational market behaviour that put heavy native steers at the same or, on occasion, even a slight discount to Texas. Trader positions were the main rationale behind this, as Asian buyers typically shunned natives and, to a lesser extent, butt branded, preferring to focus only on Texas and branded steers.

Traders did likewise leaving these two selections vulnerable to shorter term supply and demand factors that relied essentially on domestic tanners.

After the initial flurry of activity in January, prices began to stabilise somewhat in February and March when all thought prices between $65.50 and $66.50 would be the norm for the rest of the year.

Sellers enjoyed very good business during the Hong Kong fair at the end of March which kept the market fully firm on steer selections even though prices continued at generally steady levels.

Cows were in good demand and around the Hong Kong fair and early April plump brands were trading at $44-$45, up approximately 10% from early in the year. As a result many producers over-sold. Holsteins traded in the area of $51-$52, generally steady to February and early March.

Steer prices started to move higher again in late April with packers maintaining forward sales positions on Texas and brands that comprise the overwhelming majority of all US production as far as four months in several cases. Prices moved up to $67 and then $68 in May with some sales taking place at $ 68.50.

This enabled branded steers to sell during the period at $66-$67, butts the same as Texas and heavy natives maintaining their close proximity to Texas. Branded cows rose to $47-$48 and Holsteins also participated in the market's strength and advanced a dollar and more.

As is normally the case, American hide prices were generally steady throughout the summer months but as the trade migrated to the Shanghai leather fair in the first days of September, still extremely forward producers were able to push steer prices even higher.

Texas traded in September at $68-$69 with butt brands staying close to equal to Texas.

Brands sold within a dollar of Texas and heavy natives moved higher in consort trading for as much as $70. Holsteins gained a dollar and two in and around the Shanghai fair while plump cows sold in between $42-$44 and heavy natives over $50.

Things slowed after the September 15 announcement by the Chinese of draconian financial measures and restrictions that would have sharply curtailed the whole leather complex in the country.

October began with steer prices steady and the cow sector easing somewhat. However the government, realizing what they had invoked, rescinded these measures in mid October.

That ending of the period of uncertainty coincided with Asian tanners returning from holidays, stepping into the market at mid month. Volume was substantial and this had the result of pushing Texas to $70. This dragged other selections all to within a dollar of Texas and enabled heavy natives to trade at $71-$71.50.

November began with demand outpacing supply on Texas and branded steers. This enabled producers who were still sold forward as they have ever been to hold out and receive advances that brought Texas to $71-$71.50.

By the end of the month, heavy Texas had sold for $73, branded steers at $72.50-$73 and heavy natives and butts, still not highly desirable to tanners in Asia at $72.50. Cows which had been plagued with a softening undertone in the post Shanghai period barely managed to sell at steady to slightly lower levels.

China remains the driving force behind hide prices here and elsewhere. As of Nov. 9th, An American government agency reported that accumulated raw hide exports to China totaled 9,848,800, compared to 7,691,600 at the same time a year ago.

Steer prices normally remain steady at the end of most years, but as 2006 draws to a close this year could be an exception.

The majority of producers and traders are expecting even further gains in all steer prices between now and mid December. Prices for these selections are the highest since 1976, with the exception of brief spasms of BSE and FMD panics.

As the market finishes the year with one of its strongest gains in modern times, it's interesting to note that supply was not a factor. Nearly 4% more hides will be

produced by American packers in 2006 compared to 2005 and far more than in 2004.

The key factor in our view is quite simply that sales of leather products have been excellent. This has enabled major brands in footwear as well as furniture during the year to grant some price increases to tanners who had to continually pay more for their raw material.

Further price increases in leather are expected in early 2007 as new quarterly contracts between tanner and manufacturer are negotiated in the first quarter.

Markets, be they hides, or any other commodity, do not go in the same direction for ever. However, at this juncture, the crystal ball is far too cloudy to determine when American hide prices will reverse course and trend lower again. The only thing for certain is that they ultimately will.

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