KAY'S korner

Nov 6, 2009

KAY’S korner

Buy more shoes and beef

Next time you pull your boots on, reflect for a moment about how the leather business affects the price of cattle. You might be surprised at how much. That’s because hides, which are turned into all types of leather, make up two-thirds of the value of all the byproducts that come from each animal. The drop credit, as those values are called, is what enables packers to make money and influences what they pay for fed cattle.

And that is what influences what cattle feeders pay for replacements. That’s why every producer should know about how the global economic crisis is impacting leather demand and, for that matter, the global beef trade. Our industry is more global-dependent than at any time in its history. That’s been largely to its benefit, as the increasing value of beef exports has helped increase the value of all cattle. There’s a current downside though, and the global recession is hurting demand for beef and cattle byproducts.

Too many hides in the face of reduced demand for leather has caused a significant decline in hide prices. Prices for steer hides have fallen to nearly half their value of last summer while cow hide prices have fallen even further.

Recession is causing consumers around the world to cut back on buying leather items. This contraction in demand is in every segment that uses leather, from the auto industry to footwear makers. Reduced cattle slaughter in recent weeks has done little to bring hide supplies more into balance with demand. Consumer demand for leather goods, plus the ongoing woes of the global auto industry, will likely weaken further before it stabilizes.

Any improvement might not occur until 2010. Hide prices are important to producers because they add considerable value to cattle prices. For example, a butt brand steer hide was worth $68 at the end of August but is now worth only $37. The decline in steer hide prices is reflected in the slump in byproduct values.

The value has also been impacted by a sharp decline in the price of other products such as tallow. These prices reached record highs because of high oil prices, high feedstuff prices, and a low U.S. dollar. But the dramatic decline in oil prices and the global credit crisis has resulted in a decline in overall byproduct values since mid-summer.

Values reached a record high of $12.12 per cwt. for the week ended July 19. They remained above $11 per cwt. until mid-October, but quickly fell after that because of the slump in hide and tallow prices. The values averaged $6.94 the week before last, down 32 percent on the average of the same week last year. This $3.22 difference, multiplied by the weight of a fed steer (USDA puts it at 1,300 pounds) means packers are getting $41.86 less per animal than this time last year because of the smaller drop credits. If you compare current values with those of last summer, packers are getting more than $67 less per head. Hide prices have not been this low since the Asian financial crisis in late 1997 to early 1998 and before that in 1960 to ’70, says Art Anker, senior vice president in charge of global procurement for Prime Asia Leather Co. Its parent company is the largest shoe manufacturer in the world and Anker has more than 40 years in the hides and leather business. Steer hide prices had been over-valued for some time, but now the price has sharply corrected, he says. Yet he believes there is more decline to come. Consumers are more cautious, so retailers are as well, which means leather backs up at the manufacturing level. Like others, he sees no signs of an improvement in consumer confidence in the economy and doesn’t expect to see any for a year or more. The global footwear business drives the hide business, say industry players.

The casual and dress shoe business utilizes steer hides while the sneaker/other footwear business uses pigmented leather, which includes cow hides and hides from places like Brazil. The cow hide market is also driven by automobile and furniture leather demand, which has declined sharply in recent weeks. The U.S. has little of a tanning industry left. So the vast majority of hides are exported. This means they have to more directly compete with hides from other countries (the global influence again). U.S. cow hides compete with Brazilian hides. As Brazil produces 30 to 40 million hides annually, it has a larger global following for its hides than the U.S. does. Meanwhile, demand remains the driver of the live cattle market, as evidenced by the decline in cattle prices in January. Consumers are eating less beef and they are trading down in their beef purchases, from restaurants to grocery stores, and from steaks to ground beef. Middle meat prices are weak while end meat prices are strong.

Rib and loin cuts made up only 46 percent of the total wholesale value of a Choicegrading carcass in 2008, versus 43 percent for the end meats. This compares with 52 percent and 38 percent respectively in 2005. There’s no easy answer to the global impact on leather or beef demand. But you can play your part by buying more shoes and eating more beef. — Steve Kay

(Steve Kay is Editor/Publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707/765-1725. Kay’s Korner appears exclusively in WLJ.)