A view from America

Slaughter has been at a low level for the last half of 2004 and has carried over into the first weeks of 2005. There are several reasons for this as exemplified by an interview with John Miller, president of National Beef Packers, the country's fourth largest meat packer. He pointed out that the decline in slaughter is simply due to the inability of packers to make any profit and, in fact, only incur losses due to the lack of margin between historically high live cattle prices and what consumers are willing to pay for meat.

This situation is exacerbated by the embargo stopping the export of US beef to Japan and other Asian countries. Miller noted that packing industry losses have been due to the closure of the Canadian and Japanese borders. He said that the Canadian border closing has deprived the market of about 1.5 million cattle. This, in spite of Canada shipping the equivalent of over a million cattle to the US in the form of low-priced boxed beef.

Miller said he expects the Canadian border to reopen as scheduled on March 7, although he warned that congressional or court actions could stymie such a reopening. He expects the Japanese border to reopen to exports in early summer but warned that American beef has lost market share in Japan and it will be a long fight to regain it, even if the terms under which Japan will accept American beef are generous to US processors. If the Canadian market reopens as scheduled, Miller expects prices to decline in the US as trade normalises rapidly.

With respect to future slaughter, Miller said that preliminary USDA figures indicate that the American herd is expanding once again, by one to two million animals. The cattle kept off the market by Texas, Kansas and Florida growers have created a backlog, and those animals should find their way to market in late January or early February.

One would think that if there is an increased supply of hides, and there is not any better leather business, that prices would begin to fall as supply would exceed demand. However, this is far from a given in the American hide market, as can be seen in the past. We attribute this to an essentially steady market for most types of leather, and especially the 'commoditisation' of the leather used for footwear made for the nation's mass retailers. If hide prices dip below a level where tanners can profit, they typically buy more than they need. Conversely, if hide prices rise above the break even point, tanners will normally cut soaks or concentrate their raw material supply on other origins.

The only recent exception has been during the brief BSE scare seen a year ago. This is also exemplified in the price of Texas steers. Over the holiday period, steer prices ranged between a low of $63 and a high of $64. Averages were on the heavy side, ranging between 64-66lb.

Butt branded steers were sold at about the same prices as Texas as demand from auto upholstery tanners waned in the face of lower car sales and the traditional industry slow down in December. This also kept the price of heavy native steers very close to Texas.

Cow prices were also fairly steady since our last column. Holsteins sold in comparatively small numbers between $50.50-$51.50 for fleshed packer and processor productions with choice premium packers bring $2-$3 more. As in the case of steers, supplies of all cows were lower than normal, but it was enough to satisfy seasonally reduced tanner demand.

The tone of the market changed in early January however. This was due perhaps to the plans disclosed by the four major packers to drop weekly slaughter by about 20-25% in order to stem their losses and push live prices down, in addition to the BSE scare. Regardless, tanners, especially in Asia, who had been on the sidelines in December, entered the market in surprising volume and by the end of the second week in January, Texas and butt branded steers had advanced to $65, and heavy native steers up a dollar to $66.50 for 66/70lb averages. By the time you read this, there may have been important changes affecting the US hide market. We will have a better idea about the US border opening to allow Canadian cattle to be imported and, with it, an increase in American slaughter. We should also have a better idea concerning the Japanese lifting of their embargo on US meat that has significantly reduced the US kill. As we go to press, it appears that both embargos will be removed and that American production will increase, as Miller expects, beginning in March and into early summer.

It is hoped that around the same time US slaughter will increase, and therefore so should tanners' leather business. If there is no improvement in tanner's leather orders, and American slaughter does rise, we could see lower prices. If leather business picks up, and we think it will, and the borders are not open for Canada and Japan, this is likely to mean below normal slaughter that could then push prices beyond the current trading range that's been with us for so long. However, one and one does not necessarily equal two when it comes to hide prices!

We invite readers to check with [http://www.hidenet.com] to follow the market each week and see how the factors affecting American hide prices evolve.

Don Ohsman

Hidenet.com

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