Don Ohsman's view from America

As was the case in April and May, shipment problems continued to plague both producer and trader as shipping and L/C delays were seen from more than a few tanners in Asia. Trader re-sales as well as short sales took away a good percentage of what tanner bids were available, leaving producers in the lurch and seeing even less business than there really was.

The big news affecting the market and the leather industry in China took much of the trade by surprise. The Chinese Leather Association announced on June 18 that from July 1 the government would reduce export rebates on 2,831 products to curb the country's record trade surplus, ease friction with other countries and spur industries to use less energy.

As it relates to the leather industry, the export rebate on crust and finished leather will be eliminated. On items such as leather made clothing, belts etc, the rebate will be reduced to 5% and 11% on leather handbags, wallets etc. All items related to leather shoes, upholstery (automotive and furniture) will be lowered to 11%.

One major shoe brand estimates that this will increase the finished goods manufacturer's cost by 10-15 cts/sq ft and indications are that the Nike, Adidas, and Wolverine's of the world are not about to pay any more than current prices regardless of what their suppliers' costs have become. Sources conclude that as a result, leather prices will have to decline, and then the raw material price, so that tanners can operate profitably.

As noted, even before the announcement in mid June, major packers were forced to accept lower prices each week on heavy Texas and other branded steers. By the third week of June, sellers were ready to accept $72-$72.50 on 60/62lb averages but buyers' ideas were between $70-$71. Reports were heard of some trading taking place at $71.50-$71 and as we go to press, most anticipate prices to easily fall to $70 by the end of the month. On a c&f basis, $76.50 seemed to be the highest price paid in late June on heavy Texas steers and a dollar lower on branded steers. Butt branded steer prices generally mirrored heavy Texas.

Heavy native steer prices declined as domestic support was not enough to maintain previous levels. Trading took place mostly at $73.50, down $0.50 from early June but also at $72-$73 if not lower late in June.   

Native heifers were largely steady, albeit in low volume. A few trades were recorded at $64.50. Branded heifers fell several dollars since our last View. Sales were recorded at $61-$61.50 for the same 48/50lb origins that sold at $62 earlier in the month. By the third week of June, some branded heifers sold down to $60. 

Perhaps triggered by re-sales, and possibly by a simple over-hang of inventory in sellers hands, prices dropped substantially on branded cows since our last report. Tanner ideas in Asia were at $50-$52 c&f and many processors and traders succumbed for a chance to generate sales. One trade was recorded as low as $48 c&f, while other business was concluded at $49, all on averages between 48-52lb. 

Heavy native cow prices did not drop as precipitously but there were some volume reported down to $52-$53 compared to $55-$56 just a short time ago.  

Surprisingly, Holsteins gave ground very slowly with most producers well forward sold. Good processor material sold at $58.50-$59, in line with last week. Holstein steers sold at $74-$75 for the most part.

Another exception to the malaise affecting nearly all other selections was bull prices which were generally steady. Supplies remained tight and demand decent. Buyer attempts to buy natives down to $62 were scoffed at with counters seen at $65. Asian interest bids at $73 were rejected and countered at $75 c&f. 

One surprise that occurred amongst the large packer fraternity was an announcement in mid June that Latin America's largest beef processor bought America's third biggest beef and pork processor, creating the biggest worldwide meatpacking firm. JBS SA, maker of Brazil's Friboi meat brand, bought Swift & Co in an all-cash transaction worth $1.4 billion. What effect this will have on hide supply remains to be seen but initial indications are that at least for the short term the hides and wet-blue Swift currently markets will be sold under their present policy of only direct tanner business..

The Swift sale now leaves the majority of US hide supply in the following hands:

* Tyson Foods: $11.825 billion annual sales; 37,600 head daily slaughter capacity; 10 plants worldwide

* Cargill Inc: $9.3 billion annual sales; 39,300 head daily slaughter capacity; 13 plants worldwide; 9,000 million actual slaughter

* JBS/Swift: $9.05 billion annual sales; 45,715 head daily slaughter capacity; 35 plants worldwide; 9,614 million actual slaughter

* National Beef Packing: $4.636 billion annual sales; 14,800 head daily slaughter capacity; 3 plants worldwide; 3,400 million actual slaughter

* Smithfield Beef Group: $2.599 billion annual sales; 7,600 head daily slaughter capacity; 4 plants worldwide; 1,900 million actual slaughter

Looking ahead, the historically unique 18 month syndrome of many large producers being 3-5 months sold forward into their slaughter has now become a thing of the past. By the same token, all of those hides were bought by tanners who were afraid of higher future prices and bought more than they normally would.

This is no longer the case and has contributed to the declines seen since the APLF in late march. Currently, tanners prefer to buy hand to mouth in the hopes that they will be able to buy cheaper still in the coming weeks. They also appear to be adequately stocked.

There are a number of factors that cause us to develop a longer term bearish bias. Tanners have, in most cases, already bought all they need against old orders so are only filling in on new business and

servicing smaller customers who are in their slowest time of the year. There is little incentive, if not fear, given the current market trend, for tanners to buy for inventory against forthcoming leather orders, the price of which remains unclear at this point in time.

In our view, the Chinese announcement in December 2005 triggered the unparalleled run up in world hide prices seen in 2006 and early this year. It was exacerbated by the robust economy in the US, China and elsewhere and leather products being in the forefront of fashion in upholstery and footwear.

So, why should hide prices go back to where they were early this year? Why should they not go back to 2005 and earlier levels? One could come up with a theoretical justification based on hide supply, the 2008 changes and still more Chinese regulations etc, but we cannot.

We think we've seen the peak of the hide market for quite some time to come. Barring another BSE panic or some such thing, our expectation is that in the years to come, we will be looking back at 2006 and early 2007 as an historic anomaly.

Printer friendly version

Email this article to a friend