Don Ohsman's view from America

Although most packers had some forward sales positions in heavy Texas steers, it was far below what had been the case earlier in the year, and eroded further in April. By mid May, prices on this most voluminous selection had fallen to $73-$73.50 compared to $75 as April began.

In much the same fashion as Texas, packers generating branded steers turned down bids that were below previous sales levels and only 'bit the bullet' when they realized that their forward sold positions were at risk of evaporating all together.

It should be noted that packers always try to sell, what is termed, into their kill. This is because of a lack of storage space typically available in slaughterhouses, plus the need to generate cash flow for their hides as they do for the meat they produce.

Mid May saw branded steers trading at $72-$72.50 with projections that prices would fall another dollar if not more before June. The supply of Colorados seemed to still exceed demand. Bids at $70-$71 were countered by producers at $72-$73 but business was ultimately concluded between $71-$71.50.

Butt branded steer prices weakened as well in April and early May, with most sales taking place at $74-$74.50 at press time. Domestic automotive buyers which had supported the market along with Asian buying diminished to a point where this selection gave ground as did other steers.

The one steer selection that held up fairly well between mid April and early May was heavy native steers. This is because they are the most desired type of hide for American automotive tanners who support the market and normally take up all that are offered.

However, as the spread widened between natives and Texas ($74 on Texas and $78 on natives) in early May, heavy native steers gave ground and fell to $76 at mid month with prospects of $75 soon to follow.

Heavy native heifers sold in the second week of May at $67, down between $0.50 and $1 from a week ago. One trade was reported as low as $66.50. A few loads of branded heifers sold at $64.50 from river area points.

As noted in our first paragraph, there were a few exceptions to the general malaise plaguing the hide market. One was bulls. Continuing good demand and well if not over-sold producers kept prices firm on this selection.

Trades on native bulls were recorded at $63-$63.50, steady with last week. Others countered bids in this area at $65 and remained unsold. In brands, bids at $55 Laredo were not seriously considered by sellers with offers seen in the area of $61 delivered to border.

The other exception to the general weakness were low grades which proved desirable, especially to Chinese buyers who have been using them as lower cost alternatives to normal selections in an attempt to reduce over-all costs.

To gain some perspective on hide prices, it is interesting to note that the price of benchmark heavy Texas steers rose 17% in 2006. The year started at $63-$63.50 and closed at $74-74.50. After a two second lull in the first days of January, prices quickly moved up to $76.50-$77 by the second week of the year where they stayed until late March.

The change in Chinese import regulations in December 2005 certainly triggered a good part of the price increase over the past twelve months or so (at this time last year, heavy Texas was at $66.50-$67 and climbing) but it was not the only reason. World supply didn't significantly change.

In our view, what did happen was a very good economy in the developed world which put more discretionary money in people's pockets, especially in China.

Most important of all, however, was a fashion surge in ladies' boots, new styles in men's and women's footwear, and the continuing exceptional demand in leather for automotive and household upholstery.

The factors that caused the increase in steers remain, although there is at least a postponement until supposedly December 2008 regarding Chinese vat/customs increases. However, the imbalance in supply and demand that fostered the price rise seen in the first three months of the year in our view, no longer exists.

This is based on a lack of tanner bidding as well as buying that has brought Texas and brand prices down about 4% from their peak 30 days ago. At the same time, swollen packer forward sales positions have also eroded. This is evidenced by the willingness by producers to accept lower bids if volume could be generated vis a vis the large exports listed above.

As noted, steers have risen 17% in 2006 and were fairly steady until the APLF in Hong Kong at the end of March. In retrospect, compared to a 17% increase and now a 4% decline, prices are only back to where they were last December.

Given the observations above, is there any rationale that says the steer market cannot give back all or most of that 17% increase beyond the 4% seen in April and so far in May? If steers have the potential to significantly fall, it would be logical for other selections to decline as well.

Looking ahead, it appears to us that major packer's, and even processors can resist lower bids a little while longer due to forward sales. However, 'holes' in shipping schedules are becoming more common, forcing some producers to take what they can to keep up their weekly inventory goals.

Tanners appear to be far from desperate to buy hides with many 'playing the market' and bargain hunting. This indicates to us that if they feel they can buy at lower prices in the near future, they have enough inventory and prefer to wait.

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