The Jacobsen Commentary and Market Opinion

Courtesy of www.thejacobsen.com

Slow start to the week

Trading on Monday was quiet, finishing steady-to-strong with a few end-of-week/weekend trade reports mixed in. The market ended firm the previous week and was expected to be steady with traders continuing upward pressure. Late reports for HTS and HNS, at $40 and $39, showed continued upward pricing pressure, but the lack of volume toward the latter part of the previous week indicated that market resistance could hold back increases for the time being. On the matter regarding market direction, there is neither shortage nor consensus of opinion among pundits.

Equities tumbled on Monday after a three-month rally as traders took profits and paused to figure out which direction the economy will take in the second half of the year. The DJIA fell 187 points ending at 8612, off over 2%. There was a definite resistance to higher-priced sales and the stalemate ensued. Following a few carryover trades on Monday, Tuesday’s reports were negligible and all down with processor HTS in at $33, off $4 on the sheet.

Hide markets continued to be slow on Wednesday. Several sellers indicated they were in a very good forward sales position—the best they have been in since the crash last autumn. Most packers were not offering, choosing to wait for bids.

Reports for Wednesday included a few big packers HTS reversing Tuesday’s drop and ranged from $34 to $39.50. Branded steers were up $2 at $28 while butts were mostly steady at $31 to $32. The market for several selections including HTS, HNS, BS and a few cow selections appeared to have at least two tiers depending on their source or whether shipments were prompt or far out as was evident by a wide trading range.

Thursday’s market activity remained quiet continuing the previous week’s slowdown in activity and considerably less than the previous Thursday’s. Pricing pressure was on, along with resistance from buyers to increases.

The week’s hide market was uneventful through to Friday with little change in pricing in either steer or cow selections on the Jacobson Price Guide. The volume of trading was light, making it difficult to determine exactly where the market was…a sentiment fairly widespread by people in the industry. With sellers holding out for up money and buyers resisting higher prices, only time will determine where the market will settle.

Trading volume reported on Friday was moderate but down compared to the past several Fridays. One $40 packer HTS was reported along with an offsetting $34. Butts ended the week ranging from $31 to $32, HBH at $23, and HNH at $25. Cow hides were basically unchanged.

Forecasts realised

For those in the industry that predicted the previous week’s exports and sales would be down compared with the week before that, the USDA report for the week ending 11.06.09, released on Thursday, validated these forecasts. Both were down from the previous week’s high numbers of 907,000 sales and 859,000 exports, but were still at fairly respectable levels with combined hides and wet blue sales nearly even at 615,700 and exports at 615,000. Slaughter for the week was 663,000 and exceeded both sales and exports by over 47,000 pieces. Considering the previous large numbers, this does not impact inventory or sales outstanding in a significant way.

During the week, gross cattle hide sales were 583,308 with decreases or cancellations totalling 35,185, netting 548,123. The cancellations were mainly from Vietnam (17,016), China (8,680) and Korea (5,867). Wet blue whole hide and split grains, at 66,900, were not impacted by decreases.

The reduction in the export and sales for that week was a change from the recent trends over the past several months. During the past seven consecutive weeks sales exceeded slaughter and exports in all but one of the past 12 weeks. While one week does not make a trend, the reduced numbers indicate that buyers and sellers are taking a pause from the frenzied pace of business which increased the US steer market 30%.

Upward price pressure

With the leather markets priced around unprecedented cheap hides that bottomed earlier this year, tanners were scrambling to cope with the recent 30% jump in hide prices. Upward pricing pressure continued and prices had not levelled off. This created a dilemma for tanners who were having difficulty negotiating prices to keep pace with climbing hide prices. Sources indicated that some leather buyers were outright refusing any increases and were told to cancel orders if they were not able to deliver at agreed prices.

This left some tanners with no choice but to seek alternative sources of raw material. Facing unyielding higher prices, steer buyers were testing cheaper material such as branded cows and Australian Ox as well as other sources to help bring production cost in line with leather prices. Peaking interest in cheaper hides was not surprising in a rising market. With steer prices fallen to such low levels, some tanners were able to upgrade into better raw material and the reverse was only logical as the market turned.

One clear outcome of the recent global recession—and its subsequent impact on the hide and leather business—is that it has etched in our minds how inter-related all hide and leather business is throughout the world. With a finite number of hides and demand for leather in the world, prices from one region have quickly affected another, as was the case with the Brazilian market leading the US cows into freefall last fall. As currency strengthens in one country, hides from another become affordable and that country begins to increase prices until demand falters. These dynamics are in play now with the US steer market and they will undoubtedly play a role in the outcome of the rally.

Keeping in mind that the world hide markets are a factor in the new prices of US hides, most would agree leather business has not improved significantly to drive the rally. This leaves speculation as another driver for the price increases in the US steer/heifer market. Many of the high-priced sales have been for far forward shipment which begs the question, at what point will packers discontinue their willingness to sell forward or at what level are buyers expecting prices to be three or four months forward? The risk tolerance packers and buyers are willing to exercise is difficult to determine. Will the market support this price upon delivery and will contracts be honoured if it doesn’t?

Considering the recent history of contract cancellations and renegotiations it seems that the industry could see history repeated. In the words of former Major League Baseball player and manager Yogi Berra, “It’s like déjà vu, all over again.”

The international market

Italy  

Business was the opposite of what it was a couple months ago. The heavies were firmer and the lights were stable to low. The automotive business seemed a little better and this reflected on the super heavies which, combined with low kills, were scarce having pushed prices up about 20% more. The upper shoe business on lightweight was slow after a good May and is expected to be that way until the season concludes at the end of June. Tanners weren’t paying the increased prices and the situation was slow. The only hides requested were heavy weights.

UK

This was a relatively quiet week with prices virtually unchanged from the previous week. We have still been experiencing a very low supply in Europe; however, we got the feeling that tanners were a little unsure about which way the market would go. It appeared that they wanted a little more time before deciding whether to buy or to wait. Looking at the supply situation and the talk of there being some small signs of an economic recovery, we have the feeling that tanners will probably resume their purchasing next week.

China

Sources divulged that tanners were concerned older contracts at cheaper prices might not be delivered and were asking for prompt shipments, even though they did not need the hides. This was a plausible explanation for recent large US export numbers reported for hides and wet blue and the subsequent depletion of inventories.

With leather business down and not close to last year’s levels, the market was creating its own momentum with the fear that increased prices put older orders at risk for non-shipment, similar to a fire creating its own draught.

The market continued to be very slow and most tanners stopped buying US steer hides last week. With hide prices at these higher levels and finished leather prices at very low levels, they were unable to secure increases quickly enough to keep up with the market. For the cow market, interest remained for dairy and native cows and the market was expected to be firmer.

 

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