US Perspective—21.07.09
21/07/2009
MARKET INTELLIGENCE—21.07.09
The Jacobsen Commentary and Market Opinion
Courtesy of www.thejacobsen.com
As the dog days of summer quickly approach, the quiet of last week’s trading is providing plenty of time for sellers to sneak in a round of golf, or maybe even two.
With short kills and good forward-sold positions, there were few hides offered for sale. The steeply rising market is causing some suppliers to pull back their forward sales positions, compounding the problem by making fewer hides available.
Several trend charts show a steer market rising steadily over the past two months while the cow prices, after initially climbing steeply in late May and early June, have remained flat over the past four weeks. If you recall, cows led the initial drop in the hide market early last fall and were later followed down by the steer market. Several suppliers indicate that the recent momentum of steer price increases has not caught on with cows and they continue to be a drag on the market.
The independent behaviour of the steer and cow markets is probably influenced by the global supply of good- and lesser-quality hides and the demand in market segments required for each. In the cow market, a large amount of similar material is obtainable globally and the demand for its leather products, such as furniture upholstery, does not appear to have improved as quickly as upper-end products using better quality hides. A second possible reason for the stalled cow market could be the increased percentage of cows slaughtered as herd sizes have been reduced over the past several years, reducing the availability of steer and heifers to a greater extent than the simple reduction in slaughter we’re witnessing this year.
One factor on which most pundits agree is that the general reduction in slaughter around the world has been less than the aggregate drop in the demand for leathergoods. With this in mind, there is still confusion as to what the driver of this rally is. In the case of the steer, heifer and other better-grading hides, global demand must be close to the finite quantity available. In summary, the market is firm with not many hides to be had.
Stocks surged in the course of the week as investors celebrated news that the economy may not be as bad as feared. After a rally on Monday from positive financial information released, traders were encouraged by the minutes of the Federal Reserve’s June meeting expecting the economy to contract at a slower pace than previously thought.
In the hide and leather business, those looking for signs of market direction had the USDA sales and export report for week ending July 9. Combined wet blue and whole hide sales for the week at 642,700 were fairly close to the week’s slaughter of 628,000. Gross sales were significantly higher at 669,000, but were offset by cancellations in China of 70,158; Korea, 68,662; and Thailand; 5,568. Exports did considerably better exceeding kills by 163,000 at 791,000 and continuing to draw down inventories from existing overhang.
On a year-to-date basis, combined shipments of wet blue and hides are 18,132,000 or 835,000 pieces greater than the kill of 17,297,000. If you build in a conservative amount of 24,000 hides used weekly for domestic tanning, this adds 744,000 to the drawdown of stock totalling over 1.5 million.
Compared to last year, wet blue and whole hide shipments through Week 29 were very close to this year at 18,043,000, while slaughter was over 5% higher at 18,206,000. Combined sales this year at 18,795,000 exceed last year by 692,800. With kills expected to remain low and shipments up at last year’s levels, upward pressure will likely continue fuelling this rally in the US market unless buyers pull out and let things cool down.
In spite of the better environment for sellers, there is concern among some that with prices increasing so quickly the market could capitulate before hides are delivered and some buyers will not take delivery. On the other hand, the thinking is if the market continues to climb at these rates, sales will be too cheap upon time of delivery if shipments are not close in. With both scenarios a possibility, prudence is causing some to hold back on order quantities and to refrain from selling too far out.
With the US budget deficit topping $1 trillion and unemployment expected to soon exceed 10%, there seems very little to celebrate; yet bears saw a silver lining in the financials that pulled stocks higher. After a nearly 7% decline in major stock indicators, the Dow Jones Industrial Average rose 185 points or 2.3% in one day last week—the largest daily increase since June 1. In a recent Associated Press survey, analysts found people are starting to have more optimism that the worst is over but noted that spending patterns have changed considerably. Ironically the things that consumers are doing to take control, such as cautious spending and more savings, could prolong the recession.
In this business environment of a global recession and tepid leather business, the hide market continues to behave contrary to traditional rules of supply and demand by supporting the recent rounds of price increases. Over the past two months, hide prices have gone up by well over 50% with steers now in the low $40s from a low of $26—and without a significant improvement in leather business.
On the supply side, the lack of demand for beef at retail and in restaurants has added strength to the hide markets. Following a short kill of 628,000 last week, this week’s slaughter is expected to be down in the 620,000-to-630,000 range, off from seasonal kills which are more normally in the 680,000 range. This past week, with very little material available for sale, sellers are poised to continue with pricing pressure and buyers caught in short supply will have no choice but to buy.
One bright spot appears to be automotive. One source characterised the domestic Chinese market as very strong while others have indicated that the domestic US auto tanneries are buying. But demand for steer and heifers goes beyond the auto sector into other segments, leaving the impression that there continues to be speculative purchasing.
Share this story:
