US Perspective—01.09.09
01/09/2009
The Jacobsen Commentary and Market Opinion
Courtesy of www.thejacobsen.com
As sellers visit customers ahead of the All China Leather Exhibition in Shanghai (September 2–4), strong resistance to high prices and the lack of orders is becoming evident. Perhaps buyers are waiting for next week before entering the market, but so far very little trading has occurred.
Several sources confirm that availability of HNS has improved considerably from just a week or two ago. As of Friday, prices for this selection were off by around a dollar from last week, with the top price paid $59.
In industry-related news, JBS Swift informed its shareholders on August 11, that the board of directors had approved the foundation of JBS Couros. This constitutes the entry of the company into the industrialisation, purchase, sales, import and export of bovine hides and leather. The board approved capitalization up to $26.7 million to finance the initial investments. The move demonstrates JBS’s desire to continue its growth and signals its path towards vertical integration.
Slaughter for the week is estimated to be up 1,000 from last week’s but off from last year’s by 23,000. These numbers are still trending higher than the summer’s norms but will likely drop after the Labor Day holiday in the US, the first weekend in September.
As expected, last week’s sales numbers were low with a combined 434,000 wet blue and hides reported on the USDA Export Sales for week ending August 20. This follows low numbers of 572,000 the previous week and is considerably under the slaughter figure of 653,000. Gross hide sales were 14,622 higher than net sales of 348,896 with cancellations or adjustments in Vietnam and China of 12,463 and 1,566 respectively, making up the bulk of the difference. There were no significant changes on wet blue grains or whole hides.
Combined hide and blue exports for the week were up compared to sales at 619,000, but 33,400 head behind kills. Shipments of hides were primarily to China with just over 50%, while wet blues’ main destination was Mexico with slightly less than 33, with China in a close second at 31%.
The US economy appears to have levelled out according to Federal Reserve Bank of Richmond president, Jeffory Lacker. Reports from Washington suggest inventories for the second quarter fell $159.2 billion. GDP fell 5.4% on the fourth quarter last year and 6.4% on the first quarter this year. Economists are predicting the depleted inventories will bode well for the second half of the year as they are replenished and pent-up demand is filled.
Feedback from traders travelling in Asia is beginning to come back, but buying and selling has been minimal with prices in line with previous trades. After the market’s run-up, suppliers in general are feeling fairly good about their positions. Prices are back up to a range they can live with—steers are trading from the low $50s to $60 depending on location and selection.
With tanners coming off their busy season for back-to-school shoes and the boost provided in the automotive sector by incentives for consumers to renew their old vehicles now over, the demand going forward has yet to be defined. Although traders travelling this week may or may not need to sell huge quantities of hides, one thing they are hoping to come back with is a more clear definition of business conditions going forward. Can they get a better sense of the inventory levels and order backlogs of tanners there? Is the market topped and ready to retract, or does it have a little more life?
The answer to these questions will be revealed soon enough, probably following ACLE.
In spite of the Jacobsen Price Index (JPI) increasing $2.61 last week, the hide market seemed to run out of gas with heavy resistance to high-end trading. This week, with many of the industry folks away, sellers are expecting a steady market with enough momentum to hold prices until the fair. But not everyone is in agreement—a few buyers are thinking that this might be the week to buy down. Time will tell who prevails, but in all likelihood if there is any movement downward before the end of August, it will be measured. For the most part, sellers are well sold in most selections and with slaughters expected to be low after Labor Day, they will not be ready to give much ground.
By now many traders have heard from tanners that they cannot make any money at today’s hide prices. There have also been stories that many tanners and traders have ample stock on hand. This is giving some a sense of apprehension that the market might break downward after ACLE.
Although these points might be valid from a historic perspective, the hide market is still quite low. Granted, the market has gone up a great amount in a short time and will be tested, but it is not likely we will see another tailspin like last fall.
The recovery of hide prices over the past several months has been attributed to several factors including improvements in the economy and supply shortage. The steer market in particular has been very strong and is around 15% from its historical normal trading range of $60 to $70. Cows on the other hand have a way to go before reaching their traditional trading range. Depending on selections, cow prices are off last year’s prices from 29% to 54%, with better selections down less.
Short supply
Supply influence on the market this year is significant with year-to-date (YTD) slaughter through July off 4.45% or 894,000 head. This drop is not proportionate for steers and cows with shortages greater for steers. While steer slaughter has fallen 880,000 or 5.4%, cows kills have increased slightly from 3.49 million to 3.51 million. In effect, this has put pressure on the steer market and helps explain why prices have increased.
If you look more closely at the YTD cow slaughter, all of the increase in cow kills has come from dairy cows, with beef cows actually behind steers this year with a decline of 7.7%. As a percentage of total slaughter, the beef cow kill so far this year is 9.58% and behind last year’s 10.1%. This rules out the thought that a large supply of beef cows has kept their prices down to a greater degree than steer prices, but leaves open the possibility with dairy cows.
This year dairy cow slaughter is up 190,000 head—nearly 13%—over last. Recent declines in milk prices combined with a major government buy-out of 100,000 head, account for the increased slaughter. The US government is now beginning a second buy-out of 80,000 dairy cows, which will put more pressure on dairy hide selections. This year dairy cow kills are expected to be up around 250,000 from last year.
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