US Perspective—10.03.09
10/03/2009
The Jacobsen Commentary and Market Opinion—10.03.09
Courtesy of www.thejacobsen.com
Unemployment in the US in February increased to 8.1% from January’s 7.6%, the highest since 1983. The US Department of Labor reported that job losses for February were 651,000 with US job losses of 4.4 million since the beginning of the recession in December 2008.
Slaughter for the week is expected to be 603,000, down 15,000 from last week and 44,000 from the same week last year. Perhaps the one positive blip on the radar screen is that this should bring a bit of solace to suppliers as it may decrease pressure on supply.
Prices for steers on March 5, week on week, declined nearly $2 on average. The market was clearly under pressure this week. One source remarked that we have returned to November’s mode of business where the first priority was if the customer can pay and take prompt shipment, then you talk about price.
Cow prices held their own with the exception of brands, which were off around $1.25. Although this week’s cow prices remained fairly stable, the sentiment of sellers can clearly be described as stressed.
There isn’t much positive to talk about in respect to the hide industry. The general feeling going into the week was concern that last week’s decline in prices would continue and the indications so far support this intuition.
Several reliable sources are indicating that prices on bids and sales are down a few dollars. Yesterday, big packer HTS were reported at $30, down $2 in the Jacobsen Price Guide. One packer remarked that although their sales position was good, customers taking delivery was a huge problem. By Thursday, reported trades had mixed prices with BBS ranging from $29 to $32, HNS at $29, and BS averaging $27.50 with a $5 spread.
The USDA Export and Sales Report for the week ending February 26 does not provide any encouragement, with both sales and exports for hides and wet blue significantly under that week’s slaughter. While slaughter was 618,000, sales for combined hides and wet blue were approximately 50% of that at 307,000. Combined exports were 480,000, which was about 22% under. It should be noted that there was a decrease (adjustment) for Chinese sales of 161,000 pieces.
In a press release on March 4, Toyota’s Lexus division reported February sales of 6,093 units for light cars, down 48% from a year ago; and 7,015 units for light trucks down 19.5%. Of particular interest to our industry is that 100% of Lexus have leather seating.
Finally, congratulations to Johnson Controls, a major global supplier of automotive seating, for being one of only three suppliers worldwide to earn the Global Contribution Award presented by the Toyota Motor Corp.
Steep decline
The decline of the hide market last year began in August for cow hides and followed a couple months later for steers. Last July, northern branded cows were trading at a price of $0.60 per pound, in a range they had been in for the past four years.
At the same time, steers were $0.80 per pound, snug in the same range they had been trading in for the past several years. Of notable interest in the analysis of this massive market shift, is the gradual time it took for cow prices to descend compared to steers and how much more severe or farther their prices fell.
The BBS and NBC trend lines show that cows dropped from $0.60 to around $0.16 per pound over the five-month period from July to December, while butts took the three months from September to December to fall from $0.80 to $0.40. Cows dropped over 70% in value while steers fell around 50% but took over twice as long. The charts show prices trading close to these ranges in January and February of this year.
To understand the difference in timing and severity of the declines of cows and steers, you need to look at the difference in their markets. Cows, which are largely consumed in the automotive and furniture markets, were first hit with the decline of big-ticket items as the housing and automotive businesses receded last summer. Brazil also played a large factor in the US cow market decline. The Brazilian market for wet blue, competing for the same furniture and automotive business as US cows, preceded the decline of the US cow markets by up to six months setting the stage for the cow prices to drop.
Following the decline of the cow market, the steer prices held onto their historic trading range for three months before beginning to drop. But when it did, it dropped quickly. The drop for steers coincided with the US equity market decline as the world began to grasp that the economic downturn was more than a blip and retail sales along with consumer confidence fell in the tank. Contributing to steer prices holding steady so long after the cow prices descended and to the steep decline once it started, was the ability of the packers and traders, through sheer will, to keep prices up while demand gradually dropped. One other possibility for the lag is that early on while demand dropped, steer prices were stayed, in part, by suppliers holding back stock.
In the end, the drop in steer prices was less severe than cows. The main reason for this is that they are superior in grain quality and the end products they are typically used for (shoes, belts, and bags, and so on) are historically more recession proof. In addition, it also doesn’t hurt that in the global market, good quality material is in less supply than hides that grade poorly.
Keen competition
As competition in the hide and blue supply business is now sharper, keener, and more cut-throat than it has ever been, producers are trying to come up with new ways to move product.
With globalisation of hide sales and sourcing, US producers are finding that the comparisons to alternatives are options that tanners had not freely experienced for a very long time. Selling hides on the world stage requires a complete understanding and comprehension beyond simply knowing thy customer.
While the battle on price is a constant, the ability to demonstrate a viable and practical solution versus alternative origins is required. It basically starts with delivering a consistent quality product and being truly and sincerely customer focused. Up until the explosion in trade with Asia, US hides were mostly sold on a selected basis. For those readers who are either too young or missed this term, brine-cured hides were selected for firsts, with seconds being discounted $0.01 per pound or about $0.60 per hide. While today’s facilities have the latest in hide removal technology, achieving a minimum amount of damage caused by cuts and scores is easily possible and something that speaks of consistent hide quality. Returning to this measurable standard will provide a market point of difference required in the global race for sales.
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