US Perspective—09.06.09
The Jacobsen Commentary and Market Opinion
Courtesy of www.thejacobsen.com
On the economic front on Friday, mixed news was the venue once again. The US banking sector increased stock shares after an RBC Capital markets analyst said the worst of the financial crisis was over. Balancing the positive news, US retailer reports for May sales declined further than expected. According to a Golden Sachs/ICSC tally, overall same store sales dropped 4.6%. US employment for May was mixed with job losses down 345,000, the lowest it’s been since September, but the employment rate jumped to 9.4% from 8.9% in April.
The Dow Jones surged 221 points on June 2 after data on orders from manufacturing goods finally began to recover. Manufacturing orders picked up for the first time in 18 months in the US, while Europe, India and China were also showing positive signs with manufacturing orders either picking up or slowing their decline.
This euphoria carried over among some hide traders and packers. After five solid weeks of US sales and shipments, the market was strengthened. HTS, for example, raised nearly $10 from $26 to $35/$36. Packers were in a position to offer fewer hides and were continuing to ask increased prices.
On the other hand, with forward sold positioning at nearly 10 weeks out on 6.7 million hides, the $26/$28 steers sold a month ago are purported to be sold into September by some suppliers. This makes summer production pretty cheap and the $36 sales a far way off. Sources were reporting that several packers were holding back shipments on lower-priced hides or requiring old orders to be averaged with new orders at higher prices before shipments were released.
With an uptick in manufacturing orders and a few positive signs in the economy, sentiment is beginning to swing in the favour of guarded optimism. Tanners may not be convinced of this yet based on their leather orders, let alone leather prices. Many are concerned a steep increase in hide prices will not be supported by their leather customers.
Although there were sales at new higher levels, many buyers were showing resistance to prices in the $40 (cost and freight Asian port and were trying to hold out as long as possible.
May’s auto sales were better than expected for Ford and General Motors but still off 24% and 29%, respectively, from last year. Other companies reported sharp declines with Chrysler leading the pack at 49%, followed by Toyota at 41%, Honda at 39% and Nissan at 33%.
This tepid performance by the auto companies seems to be running contrary to the hide market’s recent rally. Several auto leather manufacturers reported they were seeing a small improvement in orders but there was concern it will be short-lived and business will drop off with planned extended shutdowns by some manufacturers this summer. Another bright note is inventories are in better shape and auto tanners are now participating in the hide market after a long hiatus.
Market activity and analysis
Not much business had happened by Thursday of last week with buyers and sellers holding back from any serious trading. Sellers reported a few sales but orders were not in large quantities. Several sources reported that some bids came in at the previous week’s prices but they were declined. Many sellers were resting in a good forward-sold position. Buyers were taking relatively the same approach and holding back as the standoff will determine who is in the strongest position.
The USDA sales and exports for week ending 28.05.09 showed another impressive week of exports, but less so for sales. Keeping in mind it was a holiday shortened week, sales of blue and hides combined totalled 484,500, or 132,000 pieces, fewer than the week’s slaughter of 617,000. China once again was the largest destination with over 54%. Checking with USDA sources, a small number of cancellations amounted to 29,400. China was the largest with 16,100, followed by Vietnam with 3,800 and Hong Kong at 2,800.
On the export side, combined hides and blue totalled 763,200—146,200 over slaughter. China was the largest recipient of hides, while Italy was for wet blue with 52% and 35% respectively. This continued the trend of decreasing inventories of hides and blue in the US, adding to the net positive depletion so far this year.
On a year-to-date basis, cattle slaughter through week 28.05.09 was 13,620,000 head, while combined blue and hide exports for the same period were 13,916,500. If you take into account a modest domestic tanning production of 24,000 hides per week, that makes local use of hides 504,000 so far this year making consumption and exports year-to-date 14,420,000. This exceeds slaughter by over 800,000 pieces. Without domestic production, shipment numbers are closer to slaughter but they still exceed the generation of supply by nearly 300,000.
Export sales for the year at 14,951,800 were impressive as well and much higher than the combined wet blue and hides. Although these sales certainly added strength to the hide market, the inventory reduction through export shipments and local consumption are likely playing a bigger role. Even taking into account the anaemic current state of the economy, the hide supply picture continues to improve, which could be seen as an indicator demand is picking up. Predictions were difficult to make, especially when you factor in how and when the economy will recover—but there is certainly no lack of available predictions.
Looking at last week’s trading prices through the lens of the Jacobsen Price Index (JPI), prices were down through Thursday. Beginning the week on June 1, the JPI was 25.46 and by June 4 it was 24.55, down 0.91—or around 3.5%. For the past several weeks, Friday trades have been heavy and seem to set the tone of prices for the week. Friday was no exception, raising the JPI to 28.75—over 12% since the previous Monday.
Driving this increase were significant increases for branded steers, heavy Texas steers and branded heifers. Branded steers rose on Friday to $35 from $27 the previous Friday, light HTS rose from $32.50 to $35.25 on average with a lofty packer report of $39. Branded heifers rose from $20 to $25.50 on average. Butt branded steers and CBS were not reported on Friday, but one source indicated butts have traded as high as $37. The five-year JPI showed a 20% rebound in the month of May.
International commentary
Australia
Export sales were made for all selections with conservative increases in pricing but in line with the A$ currency increase against the US$. The currency rise was foremost on traders as they tried to keep up. In the last month alone, currency has increased 18% and, while prices are improving, some traders are finding it difficult to keep up.
In the domestic market, price increases met with resistance but there was good demand—price permitting. Smaller weight hides and drops were experiencing a reasonable demand at lower prices.
Kills are falling in Southern Australia as the winter sets in. In North Australia the heavy rains, flooding and shortage of stock has caused a dramatic reduction in production with one source indicating that there has probably not been more than two weeks of full production in months.
UK
Last week was quieter than previous weeks and suggests tanners were evaluating the higher asking prices and questioning whether they could afford to follow it or not. Much of the buying over the last month has been a combination of tanners having to replenish exhausted raw stocks and buying forward in case of a sudden upturn. Demand in Europe remains strong but as the European shutdown approaches we feel there will be a levelling off of price and hide prices will remain stable thereafter for the near future.
