After so many weeks of stress in the workplace, the New Year holidays saw Chinese and Korean tanners take a break so there was a short respite. The change of pace was both needed and appreciated after weeks of dealing with cancelled or renegotiated contracts, then storing and shipping so many hides. It is at this time that we realise just how dependent on Asia most European suppliers have become.

However, the huge financial losses will be with us for a long time to come. So, although we recovered a bit from the exhaustion because of the slower pace, it will be some time before we recover from the depression of it all. While the old saying “time heals all wounds” may be applicable, the disaster of the past two months has created such deep financial wounds that some may not survive. At the very least, the template on which each supplier and trader has worked under for some years will, or perhaps should, change. But change is difficult to attain sometimes, unless of course you are Barack Obama.

So, how should the system under which hides are bought and sold change? That is a good question with lots of potential answers. Considering the number of exporters we have, each packing, processing and trading company is likely to have their own idea about what needs to be done. Some will simply do nothing and do what they have always done. Some will deny any change needs to take place. However, we suspect and hope that most will see the need for reform and will work to implement changes that are long overdue.

Coping with contracts

The biggest challenge for the hide industry today is dealing with non-performance of contracts, claims and transaction terms. This week we’ll address the contract problem. In the past, contracts were written with a term at the bottom saying roughly: “This contract is governed by international contract number six”. This number six contract was established by the International Hide and Skin Association that most countries, including the US, used to belong to. However, most members have now withdrawn their memberships.

Some American exporters still put this clause into their contracts but, in reality, it means nothing. The one document that should be compulsory is the “Standards for the Export of North American Hides” that the US Hide, Skin, and Leather Association initially printed and then re-worked a few years ago. This is a credible and worthwhile source that many in the industry have either abandoned or forgotten about. Quality issues, piece counts, and all other hide particulars are all well addressed and explained. The US hide association even went forward a couple of years ago and had it printed in Chinese and these were handed out to Chinese tanners during the various Hong Kong and Shanghai shows. Perhaps demanding everyone, both buyers and sellers, to adhere to the articles set forth in the standards would be a good start in terms of initiating change in the industry.

More than one market

During these extraordinary times it’s hard to “get your arms around” the hide market. Towards the start of the week, the steer market was called at around $37 for butts, Texas and natives and from $26 to $29 for heifers. However, looking at reported trades from various sources, steers ranged from $34 to $40 and heifers were down to $23.25. As we look for an explanation for the wide ranges of reported prices and diverse opinions from hide pundits, one possible answer is that there are actually two or three markets taking place simultaneously.

In this hypothesis, we have one traditional market consisting of new sales. Here, the buyers and sellers take into consideration their particular circumstances and positions and then settle on a price that is the true market value. In our second market, old problems are solved with re-sales, re-negotiations, and packaged deals. The third is the special circumstances market derived from the necessity to move and convert inventories to cash. The third scenario is more likely to be where the bottom levels of trading are formed.

Getting the price right

On the topic of price spread, two factors worth mentioning are point of origin and product value. When product quality is equal between two sources, plants where freight is greater than their competitor’s will have to adjust prices accordingly to compensate for an equivalent delivered cost in order to remain competitive. Relevant to product value, and speaking from personal experience as a consumer of large quantities of hides, hides of a similar weight and selection are not all worth the same. Regional differences and animal husbandry can affect hide grain quality. Packer and processor techniques and attention to quality can also have a huge impact on hide quality, leather yield and its value.

There is no doubt we will continue to see pressure and testing of the markets during these tumultuous times with occasional reports of extreme highs and lows. Most in the trades are hoping that this bottom will hold while some are hopeful it will climb a notch. However, given global economic conditions, we are likely to be stuck in this range for a while to come.

Changing climate

According to the National Climatic Data Center, the Earth just experienced its warmest northern hemisphere winter on record. The three-month northern hemisphere winter period December 2006 through to February 2007 had an average global temperature of 1.3°F above normal, beating the previous record set in 2004. The southern hemisphere (where it was summer) had its fourth warmest summer on record. NASA confirmed that 2005 was the warmest year on record. This was achieved without the help of an El Niño, which indicates that the temperate trend is continuing with more increases expected in future years. The implications of a warmer climate are numerous.

The effects of winter impact each and every level of our industry. From the feedlot operator through to meat packer, processor and tanner we are all affected by the increased weight attached to each hide as we transition from summer to spring. While packers often struggle with the bacterial implications transported on the hide, the hide processor and wet blue converter see yields change dramatically as raceway and drum loadings fluctuate considerably during winter months.

While not wanting to minimise the consequence of these seasonal occurrences, the key driver or sector influenced by winter hides is at the end of the hide supply chain not the beginning—namely the tanner. The corresponding quality and value paid is ultimately determined by the leather yield, not only in terms of raw footage but more importantly the grades that can be achieved from the same origins that during the summer months were judged as acceptable. The tanner’s ability to produce full versus corrected grain and aniline compared to semi-aniline leathers is always challenged during the winter months. Mange, manure balls, belly stains and insect issues are only a few of the various negative characteristics that constantly arise during winter season hides.

The colder the better

The irony lies in the scope of winter’s extremes. Mild climate conditions during the first quarter of the year often translate into poorer hides. A report published by Steve Boyles, Ohio State University beef extension specialist, and Jeff McCutcheon, Knox County ANR agent, says: "The colder the better, with snow being preferred over cold rain. We lose what is called 'air insulation' in cattle that get wet versus those that are out in the snow. The air pockets between hair fibres are a source of insulation. We lose this insulation when hair gets matted down in a cold rain. The result is that the dry winter coat goes from having a critical temperature of 32°F to about 59-60°F."

While this article was addressing feeding and the challenges of winter, it is relevant to consider that the warmer and potentially wetter the hide, the more mud, manure, sand and other materials it will trap. Historically, we have seen anywhere from 30-50 pounds of this extraneous material affixed to each hide. The impact of processing this valuable substrate when burdened with multiple pounds of superfluous materials is a constant opportunity for processors. The winter challenge to manage fleshing machine adjustments in a dynamic environment in order to adequately deal with hardened manure is a daily assignment. The packer and processor must endure all this in addition to coping with contamination and waste disposal matters. Besides the hide and, therefore, leather quality aspects, the ability to optimise container/truck loading diminishes as each hide gains weight and in turn the per hide freight costs are consequently higher; sometimes by at least 15%.

This year, we believe that the challenges of winter hides will be more difficult to understand and manage considering that this winter season could potentially last into early summer. With a general increase in temperatures, the major feeding states Texas, Nebraska, Kansas, Colorado and Iowa, will all potentially face higher moisture conditions which, as we described above, does not bode well for hide quality.

What is now possibly the wild-card in this yearly cycle is the effect of shipping delays and contract re-negotiations. Considering that the supply of meat and hide production is independent of demand for leather and hides, the suspicion of hide inventories accumulating in warehouses across the Midwest would suggest that in the immediate short term we will see fewer winter-type hides as suppliers are still liquidating October and November production. Therefore, the true winter hide season could be delayed into late spring or even summer.

Room for improvement?

Recently, there has been an upward push from some in the market in an attempt to move prices into a new trading level. With the thoughts in mind that the market has settled comfortably into its current level of trading and the spring season soon to be upon us, one argument could be that there is room for upward movement. However, some aren’t so sure that any increases will stick, citing backlogged inventory and poor consumer demand as the reasons. Only time will tell as to whether any increased prices will hold. But if we look into the reported export sales from USDA for the week ending 22.01.09, there is little to be bullish about.

Sales and exports of combined hides and wet blue for that week were 376,700 and 458,000, respectively. These figures were considerably below the same week’s slaughter last year at 638,000. Exports were 180,000 pieces, 28% under kills and sales were 261,300, or 41% below. This does not take into account a small domestic finished leather production but, nonetheless, it puts a fair amount of hides into the warehouse.

Market activity was reported as slow on Thursday. Several selections were traded at new high levels while most remained steady. The USDA reported that the slaughter for the week including Saturday was estimated at 631,000, up 19,000 from the same period last year. This continues to put pressure on the hide supply side.

The week ended without a great amount of enthusiasm from sellers. Whether we look at the auto sector, where Nissan chief, Carlos Ghosn, predicted a drop in global auto sales (from 69 million cars in 2007 and 63 million in 2008 to 55 million this year), or Friday’s US GDP report of a 3.8% decline for the fourth quarter (the worst since 1982), there is not much to celebrate.

Still to come

As the industry awaits news of JBS Swift’s bid to acquire National Beef, the Department of Justice has once again postponed the anti-trust court hearing until March 6. According to industry estimates, a merger of the two beef producing giants—Swift is third largest and National is fourth largest—would create the largest US beef producer, surpassing Tyson Foods. The Justice Department, along with 13 states, filed suit in October 2008 to block the buyout, contending that the deal would mean lower prices for cattle producers and higher beef prices for consumers.

Next week will bring the Korean and Chinese tanners back into the market and sellers are optimistic action will pick up then. Although it was a bumpy ride this week with a fairly wide range of reported trades, the market ended the week unchanged. We eagerly wait to see which direction tanners will take upon their return next week. Our feeling is that they will start to buy but within a narrow price range.

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