The Jacobsen Commentary and Market Opinion

Courtesy of www.thejacobsen.com

As business resumed following the President’s Day holiday on February 16, there was not much encouragement to support the hide market. Trades reported on February 17 were in line with, or slightly under, the previous week’s prices. Branded steers were $28.5 to $31 with butts, and heavy native steers at $33. Some traders expressed concern that, with hides backing up, there was difficulty keeping ahead of supply. There was also mention of softness in the market with maybe a drop of a dollar. Weighing heavily on everyone’s mind was the continuous stream of horrific economic news including a 300 point drop in the DJIA on February 17.

By midweek, the hide market appeared to be mired at the bottom of its trading range. Business from Asia had not picked up and there continued to be downward pressure on pricing. Reported trades on February 18 were either in line with, or below, last week’s prices. Branded steers were the most widely reported selection with a wide trading range at an average of $33.

On the retail side, the World Shoe Association tradeshow in Las Vegas wrapped up on February 14 and was reported to be poorly attended by both shoemakers and retailers. This lacklustre interest in the event—regarded throughout the leather trade as an indicator of upcoming business—was not a harbinger of encouragement for those making a living in the industry.

Coping with the realities of a new playing field, the US packers last week were reported to be making more offers. Word is that some packers became quite aggressive in selling hides with prompt shipment. Foremost on the minds of sellers was the overhang of inventory needing to be dealt with. Many in the trade are concerned that these large inventories will add too much downward pressure on the market and it will not be able to sustain its current level of trading.

The reported amount of trades on February 19 was fairly low. Prices for big packer steers were down slightly from previous reports. Slaughter for the week to February 19 is slightly behind the previous week’s 494,000 with estimated kills at 483,000, but ahead of the same period last year at 497,000.

Struggling to move hides

In the hide and leather industry, the sense of frustration and loss of control are deeply embedded in the minds of those manoeuvring through uncharted territory. Everyone knows the economy is tearing the base of the hide and leather business off its foundation. Every day, we are constantly reminded that there is not enough demand to keep up with an unyielding supply of hides. Further compounding our frustration is the wide range of bids and trades reported as the market continuously tests its boundaries.

Until consumer confidence returns, the struggle to move hides and keep the markets from falling further is a daunting task that has those in the industry on edge, and at wits’ end. While achieving both at the same time is obviously everyone’s goal, moving hides and maintaining steady prices in these market conditions is most certainly difficult. The bottom line is that each must do what is best for their businesses as they prioritise what is most important; holding out for the highest price or taking a lower price to keep the product moving. This basic economic struggle will ultimately set the market but, until that happens, everyone’s job will be more stressed.

The market on February 20 was fairly quiet with a normal amount of reported trades. Price pressure was evident with reports either level or a little lower. As the week came to an end, the sentiment expressed by most in the trade was concern for the direction business is heading.

Last week’s USDA sales and export figures were released on February 20. Combined hide and wet blue sales were 519,000 and exports were 556,000 with both falling short of the week’s slaughter of 614,000. This would suggest that pressure on inventories is not diminishing. The week’s slaughter was estimated at 615,000, very close to the previous week’s 614,000, and 6,000 under the same period last year.

More closures

On February 19, San Antonio Shoes (SAS) announced it will close its Conway, Arkansas, plant this summer. Layoffs from this closure are expected to affect 144 workers.

News broke early on the afternoon of February 20 that the JBS Swift bid to acquire National Beef Packing Co. is off. "We fought hard but unfortunately the Department of Justice wanted to keep us the same size as Tyson and Cargill," said JBS president, Joesley Mendonca Batista. Steve Hunt, chief executive of National Beef's majority owner, US Premium Beef LLC, said the company pursued the sale because it would have helped them grow their business. "We're all disappointed that it came to this," he said.

Petitioning the President

In recognition of the US holiday honouring American presidents, The Jacobsen submitted the following to the new President:

We are an industry that has steadily contracted and today our numbers are few and our image is misunderstood. We, as a resource, while not glamorous, have often been regarded as the second oldest profession in the world. We serve a purpose for which we have continuously not received recognition. In fact to the contrary, for some obscure reason local communities frown upon our presence and infer that we carry the legacy of poor internal controls and environmental afflictions. We understand the negative bias but this is hypocrisy at its most fundamental level.

From the Allen Edmunds you wore to accept the oath of office to the seating in your limousine, our product is adored, embraced and regarded as an essential luxury item. Yet the American industry that not so long ago employed directly more than 100,000 citizens and more than one million in allied fields is today in need of stimulus. We are no longer able to contribute to the greater good of our country and we struggle that, with living in the heart of the largest and best raw material supply in the world, we are unable to operate. We offer a solution that dovetails with your vision for putting Americans back to work.

Over the past five months we have witnessed a meltdown in the hide market. In addition, contracts made to our overseas trading partners have become more toxic than the sub-prime mortgage loans. For the past ten years, our suppliers sacrificed support for the domestic industry in favour of providing a continuous supply chain that produced cost-effective consumer goods for the public.

The petition, part two

We as a resource, while not glamorous, are an essential component of the protein complex and a basic need to sustain our way of life. From the appetisers served at your first official luncheon to the prime rib at one of your inauguration balls, our product is adored, embraced, and regarded as an essential—a basic facet of the American lifestyle. Yet we struggle in the face of not only government oversight but in regard to value add. The respect for our by-products has been shattered due to recent non-performance by our trading partners.

Over the past several years, we worked hard to expand our reach and open overseas markets which directly contributed to providing Americans with cheap consumer products. The sacrifices we made to support Asian tanners with a continuous flow of product, even to the detriment of the domestic market, was a conscious decision made by looking at the greater picture. Over the past five months, we have witnessed a meltdown in the hide market resulting in the value of this important export losing literally more than $250 million.

Today we are frustrated with how to conduct business when the fundamentals of a transaction are not upheld. We frankly lack confidence in contract performance and, therefore, are reluctant to extend credit and export hides. We are accumulating inventories which could be avoided with the presence of a viable domestic market. We need to bring the shoe manufacturing business back to America. We need to invest in footwear factories that will put Americans back to work and in turn revitalise the American leather industry.

The international market

Australia

The hide markets in Australia remained bearish with prices identical to the previous week’s. Sentiment is no different to that in the US market, with volume business virtually non-existent and hides difficult to move. There are a few order confirmations from tanners wanting to buy the odd container or two, but sellers are never sure whether they will translate to actual sales until the goods are paid for. Customer default and bank risks are driving suppliers away from selling CAD (cash against documents) terms without substantial upfront deposits.

Slaughter numbers were down for the time of year due to heavy rains in Queensland, which is prohibiting cattle movement. Slaughter numbers are expected to seasonally decline in the southern regions (Victoria/Tasmania) after March. With cattle supplies cut, many meat works are not operational this week.

News that Australian Agricultural Company Ltd. (AAco), Australia’s largest cattle rancher, is reorganising its operations to accommodate consumer demand for cheaper beef cuts was reported by Reuters. AAco is selling three of its cattle stations in Queensland and another two in the Northern Territory to reduce its dependence on grain fed beef.

As the world is aware, horrendous wildfires in southern Australia have wreaked untold devastation and cost the lives of hundreds of Australians. The Jacobsen family wishes to extend our thoughts and prayers to all those affected by this horrible disaster. The concern and frustration of one person from the hide and leather trade described the emotion regarding the fires: “We live in a land we cannot understand—it’s like the apocalypse. Floods and fires have brushed through Australia leaving death and destruction in its path.”

China

Two weeks after the Lunar New Year, the anxiously awaited increase in business has not come to fruition and sellers from export countries have to settle for a much smaller slice of pie. Yes, there is business, but it’s not anywhere near where it was a year ago. In the past two weeks, the side leather market for shoes has been moving better than furniture but cannot be considered fighting fit. The expectation for upper shoe leather demand is off somewhere between 25% to 35%—less than where it was during the same period last year. Furniture business is still very bad in most tanneries and more factories are in danger of closing.

On the pricing front, sources indicate that many Chinese tanners have enough inventories and are not motivated to buy except at special prices, and some tanners are not prepared to pay over $40 for steer selections. Word is that $43 C&F packer HTS was very easy to get last week and that they might break the $40 range soon. The main point did not seem to be price. Regardless of price point, there is not enough business to keep up with the hide supply being generated every week let alone clean up the backlog of hides built up around the world.

With hide producers worldwide carrying inventories, there was talk that tanners were preparing themselves for quality issues related to old hides from longer storage. Sellers might take a different view after the last round of claims and renegotiations. From their perspective, this could be another excuse used as a precursor for price claims in the event that the market slips to a new level.

UK

Last week saw a steady trickle of interest for UK material, albeit at reduced prices. Once prices were lowered by about 5% to 10%, some interest was generated, which may mean one of two things. Firstly, it could mean that tanners have leather orders that need filling as long as the raw price fits. Or, secondly, it could mean that if the hides look cheap enough, then tanners may be prepared to take a punt on them. As an industry, we hope that it is the former; however, this will only be known if the orders are placed on a regular basis. Again, we cannot see how our hides can possibly become any cheaper although, with a weakening pound, anything is possible.

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