A view from America

Now, as the year comes to an end, there are few who expect any change in this situation until sometime in January at the earliest. The rationale is that December slaughter is traditionally at its lowest ebb during the peak season for turkey and ham consumption while, at the same time, new leather orders and orders for finished goods also slow down to a trickle until retailers see how Christmas sales go.

There have been a few exceptions. These are mostly in the cow sector, where prices in the past month have given ground, in some cases by more than 5%. Bulls have eased with sales recently as low as $54 and $55 for natives and $51-$52 for brands. Small packer prices have also dropped a few percent. This is because Mexico, the main customer for this type of material is also slowing down for their Christmas/New Year hiatus with nearly all tanners closing for extended periods in observance of the holidays. Italy, another major importer of hides, also closes for extended year end celebrations. Taiwan and China close for their Lunar New Year holidays in early February with all buyers trying to reduce inventories and have as little raw material as possible on hand when the tanneries close down.

This does not mean that supply is about to exceed demand and force prices lower. To the contrary, as we go to press, live cattle are selling at high enough prices to create large losses for the nation's meat packers. The largest companies such as Swift, Excel, Tyson/IBP and National Beef have curtailed slaughter to an extent where they have temporarily been forced to close certain plants. Some of these companies admit to losses of $50-$100 per head in and around Thanksgiving as meat at retail is unable to bring enough money to compensate for the high cattle costs. By the same token, feedlot operators paid so much for the current inhabitants of their cattle 'hotels' that they too have are striving to maintain these high prices in order to avoid large losses.

The industry was almost thrown into a state of flux again in mid November when one cow tested preliminarily positive for BSE. The trade held their breath for nearly a week until government tests showed that the animal was disease free. This also came at a time when Japanese/ American negotiations were making significant progress to break the ban on the importation of US beef into Japan, followed by Korea and Taiwan, all of which are among the largest customers for our meat. At this juncture, it looks like meat producers should be able to resume exports sometime in late spring or early summer.

The other good news with respect to supply was heard in mid December. Although, as we write this, the USDA has still not published its long-awaited rule to allow cattle and more beef products to be imported from Canada, we understand that it appears the ruling will allow only cattle less than 30 months of age to enter the US. Sources advise that the rule may allow in some beef products from cattle 30 months and over. Observers though say it doesn't make sense to allow in the beef but not the cattle.

The progress on trade talks with Asian countries is another positive sign that packer profits could reestablish themselves by next spring and hide supply could again become more normal. However, this does ensure that hide prices would come down, as tanner inventories are likely to be in need of replenishment for the the start of the busier season where finished goods manufacturers usually begin to place larger leather orders in order to work for their fall seasons.

Heavy Texas and butts traded at $64 since our last report. Branded steers sold at $63, just as they have been for more than a month and Colorado's moved at $62, also as they have for many weeks. Heavy native steers, were affected by a slowdown in automotive leather demand, but prices were only incrementally lower with trades taking place towards mid December at $66.50.

Many in the industry have discussed why hide prices have not moved higher in the face of slaughter that is more than three million head below 2003 or a reduction of about 9% less than last year's record totals. The main reason is that although leather business is not bad, leather prices have not risen commensurately with US hide prices. In order to reach price points at retail, manufacturers of footwear as well as upholstery have forced lower prices on their suppliers, who have turned to the tanners they buy leather from.

Due to enhancements in technology in the tanning process and advances in chemicals, tanners, especially in Asia, were forced to find cheaper raw material, mostly from South America. This is poorer quality than US hides, and the leather sells as much as 40-60 cents/sq ft cheaper. However, it is adequate to meet consumer demand and, even more important, to create a finished product that meets retail price points. Therefore, the reliance on a steady diet of US hides eroded as more substitute raw material is utilised by tanners and their customers. Many fear that it may never return unless US prices get closer to those origins that produce lower quality hides.

To sum up the hide and leather industry this year, the most commonly heard point made in conversations lately is: 'I'm sure glad this year is almost over!' And yet, to get out of bed each morning, one must be an optimist. We hope that 2005 will be a good year for our readers and the entire industry.

Don Ohsman

Hidenet.com

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