The Jacobsen Commentary and Market Opinion

Courtesy of www.thejacobsen.com

Market activity and analysis

The market was quiet on Monday with only a small number of trades reported. A processor NHNDC reported at $43, reducing the selection by $6.50 to a level considerably lower than packer heavy native dairy cows are selling for.

The market was fairly quiet on Tuesday with a low amount of trades and people still bullish. We took a number of processor trades, which were mixed, and one packer HTS trade that was up a dollar at $67.

The market picked up a notch on Wednesday, but only slightly, with packer trades outnumbering processor sales. Prices were relatively steady with the exception of a packer branded steer sale for $67, up a dollar from Tuesday’s high. Across the board people were beginning to sense the market shifting. Although you would not call it soft, there was less volume business with some signs of resistance to higher prices that were not there at the same time during the previous week.

The hide market remained firm on Thursday; however, sales volumes were smaller. Buyers were willing to pay higher prices but were limiting the size of order to smaller quantities. A fairly large number of sales was reported on the sheet with prices falling within the previous week’s trading ranges.

Friday trading followed transactions in earlier weeks with most prices within the previous week’s trading range.

Lower kills expected

A few weeks back we predicted that 2010 kills are likely to be down somewhere in the range of 3% from last year’s. In 2009, federally inspected slaughter was 32,765,000, down just over 3% from 2008. If predictions for 2010 are accurate, then we would expect kills to be around 31,782,000, or 611,000 weekly.

Apparently, packers did not receive notice as slaughter during the first three full weeks in January exceeded last year’s numbers by 33,000 per week, nearly 5.4%. Three weeks do not make a yearly trend; however, pundits still expect kills to be down this year, particularly with dairy cows which last year saw increases in kills due to the Cooperatives Working Together herd reduction programme. Last year the programme removed over 200,000 head from dairy herds in order to stabilise milk prices. According to the cooperative, milk prices have returned to sound levels making further cow herd cutbacks less likely.

Last week’s US Cattle on Feed report has cattle in feedlots on January 1, 2010, at 11 million head, 2% below January 1, 2009. Placements in December 2009 were 1.55 million, down 6% from 2008. From the standpoint of supply availability, on the surface, both the year’s lower cattle on feed beginning inventory and December placements could support the hypothesis that kills will be lower in 2010.

This, however, is not that simple, especially concerning the lower placements. Placements in December were very low, largely due to the severe winter weather, and are expected to be compensated by exceedingly large placements in January. According to a source from the USDA, feeder cattle auctioned last week were “higher than ever”.

Although there is an explanation for lower feedlot placements in December, if this year’s slaughter numbers are reduced to levels many are predicting, the cattle on feed could be a factor going forward. At some point you would expect placements to match future slaughter.

Wet blue exports down

Looking back at the past three years, there has been modest growth in whole hide exports each year culminating in an increase from 25.47 million in 2007 to 26.69 million in 2009—approximately 1.2 million pieces, or 4.8%. During this same period, wet blue experienced a similar change in numbers but in the opposite direction, falling slightly over 1.3 million pieces and approximately 18% for total exports of unsplit and split grains. In 2007, combined whole hide and split grains were 7.2 million, falling to roughly 5.9 million in 2009.

The largest share of the wet blue contraction occurred in 2007 when shipments fell by nearly one million hides to 6.22 million in 2008. The drop that year was divided fairly evenly between split and unsplit wet blue but favoured unsplit, which fell 512,000 while split blue dropped 467,000. The decreases in unsplit blue shipments predominately came from China and Italy, which were down from 2007 to 2008 by approximately 599,000 and 413,000, respectively. This was offset by increases in exports to Taiwan of slightly over 554,000 pieces. The major change for split grain shipments was drops in the Dominican Republic of 184,000 and Mexico of 292,000.

In 2009, wet blue export shipments diminished to a lesser extent than in 2008, falling 323,121 pieces to 5,899,070. The drop came mostly from unsplit of 279,286. This occurred in several places but most notably was a decrease in export shipments into Taiwan of 404,578. Increases of 419,000 in unsplit wet blue exports to China were offset by decreases to Hong Kong of just over 452,000.

In retrospect, many factors have contributed to the decline of wet blue since 2007 including changing global marketplaces, a major recession, and changes within US wet blue manufacturing. Auto business, which was dominated by the US, has made a major swing from North America to China, where last year China surpassed the US in auto sales. From 2007 to 2009, ownership, with subsequent downsizing of Prime Tanning’s wet blue facility, changed twice, ending with National Beef Leathers as the new operator of the St Joseph facility. Although all are factors that contributed to the wet blue export decline, nothing jumps out as the major element.

This year is starting out with a somewhat improved economy compared with 2009 and there are changes on the horizon for wet blue manufacturing capacity in the US. This includes the reopening of one wet blue facility in the Midwest and the expanded capacity of another major supplier. In the global marketplace, the dynamics of emerging countries such as Vietnam’s growth in the leather business and new wet blue plants being built in Northern China will play a role in US export wet blue business. Capacity will not be an issue for US wet blue. The determining factor in 2010 will likely come down to demand again. It should be an interesting year!

Steady market

The hide market remained relatively solid in spite of larger than normal kills. Keeping in mind hide supplies and markets are global, this year other locals such as Europe and Australia are experiencing lower than normal kills, offsetting the higher US kills. Large kills in January do not seem to be a factor with hide prices at the moment in spite of the fact that the market became very bullish at the end of last year on anticipated lower US slaughter.

This begs the question—what is driving the market? Some feel that many tanners were caught short and stayed out of the market too long, expecting prices to fall ahead of the Chinese New Year. There has been a huge increase in the domestic Chinese market in the shoe, automotive, and furniture sectors, which are factors, although to what degree is difficult to quantify. The puzzling aspect of the demand side of the market rally is the rest of the world’s economies, which are just barely recovered from the recession.

Pundits noted that the market was firm on pricing last week, but business volume was not exceptional. Buyers who needed hides bought at the higher prices but in smaller quantities. More than one supplier commented they hoped hide prices would not go any higher for the moment. Business activity tapered off sharply by the week’s end.

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