US Perspective—12.05.09
13/05/2009
There was an exceptionally large quantity of sales activity reported at the end of last week, more for a Friday than seen in many months. As the week ended, the market was strong with price increases in virtually all steer and heifer selections. HTS were reported for $26.50 to $35 (jumbo) and butts from $25 to $29. Heifers were as high as $20.25 for natives and $18.25 for brands. The pulse of the market was definitely more upbeat than it has been for quite some time. Next week’s trading is expected to be firm and steady.
In the automotive sector, Toyota reported its first fiscal-year loss in 59 years. Toyota’s losses in its fourth quarter were $7.74 billion, exceeding GM’s $6 billion loss. Toyota expects even greater losses for its current fiscal year ending March 2010.
Sources indicate the US auto market is expected to drop from 16 million to 9 million units, or 44%, this year. With the leather in use in approximately 25% of cars, this will reduce leather demand by 1.75 million units in the US alone. Factoring in a couple hides per auto, that’s a lot of hides without a home. This obviously did not seem to affect the hide market this week as buyers were willing to pony up to higher prices.
For the second week in a row, sales for hides and wet blue were over 1,000,000. USDA reported combined sales of 1,056,500, just under last week’s 1,067,900. The combined hides and wet blue were made up of 955,700 hides and 94,600 wet blue. As expected, most—46% of the hides and 41% of wet blue—were destined for China.
Exports for the week ending April 30 for combined hides and blue were 693,600, which exceeded the same week’s slaughter by 59,000 pieces or around 9%. These exports follow 795,000 the previous week, exceeding slaughter by 25% and helping the reduction of built-up inventory.
While sellers are keenly aware these volume sales have placed them in a better position, most do not see the leather business increases as the driver. While recognising the global economy may be seeing glimmers of hope, they are aware that its fundamentals are relatively unchanged and recovery is a distance away.
Once in a lifetime
One possibility for the sales increases is that buyers have anticipated a bottom to the hide market and do not want to miss it. These very cheap hides could be an once-in-a-lifetime opportunity.
In this case, they are borrowing from the future and at some point this will result in reduced purchasing. Another possibility could be they are anticipating business improvement later this summer, that, if comes to fruition, will drive the market higher. Finally, it could be argued that past history has shown us that some buyers may cancel old contracts if the market turns in their favour and some of these sales are caught in that vicious cycle. Let’s hope this isn’t the case.
Improved forward sold positions this week have given confidence to packers and several of these—to the dismay of buyers—picked up prices. The jury is out as to whether they will stick or not, but the volume of sales so far this week is behind last week’s and is not expected to come close.
Most pundits agree the market is firm and has grounded this week. Interest appears to be good with some sellers seeing more activity. Several suppliers have indicated they are holding back on bids at last week’s prices, especially for long orders.
As packers examine their first-quarter results, the burden of a depressed drop market is weighing heavily on margins. According to a recent article in Cattle Buyers Weekly, drop revenue is down nearly $64 per head. This represents a 46% reduction in drop value compared to a year ago.
Hide price factor
One factor in these losses is the reduced tallow prices as fat and oil commodity prices have fallen. The most significant factor, however, is the one the leather and hide industry is most familiar with—the drop in hide prices. With steer hide prices in the mid $60s last year and $20s today, they have fallen around $40. Cows have fallen between $35 and $39 depending on selection.
Hides normally represent two-thirds of the drop credit value packers can count on. With drop losses around $64 a head, these $40 hide losses are consistent with other drop devaluations making up close to two-thirds of the overall losses. Packers are not expecting there to be any significant change in the hide market before there is improvement in the world economy. We all know that drill and can feel their pain.
Not only are packers suffering from drop losses, but the declining economy has also impacted revenues in other ways. With consumers cutting back in discretionary spending, there has been a reduction in demand for the more expensive cuts of meat. This in particular is true in the food service sector as business is down in casual and upscale dining. In addition, packers have seen decreases in trim and ground beef prices over the past three months owing to excess supplies from dairy cow processing.
With retail demand off, packers are hoping the grilling season combined with retail promotions will help increase sales this summer but do not expect it to be at last year’s levels. The H1N1 flu is also a factor currently influencing beef demand, but experts have mixed opinions. On one hand, restrictions on pork product exports could increase supply offered at retail in the US, which could hurt beef demand. On the other hand, as long as there is a perception that H1N1 is connected to pork—whether founded or not—pork sales could be hurt and beef helped.
Looking at what the impact should be on slaughter this summer; most experts are expecting it to be up but below last year’s levels. This will keep pressure on hide supply considering world demand for leather is unlikely change for some time to come.
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