The value of hides and offal has been declining all year and now threatens to drop below the previous five-year average as its principal ingredient, hides, loses buying interest. Further declines are possible, since the factors that went into the decline remain in place.
Hides make up the bulk of a USDA statistical grouping of the hide and offal value that the industry calls the “drop credit” or simply “the drop.” In addition to hides, it includes the non-muscle and bone items that either are consumed as beef products or used for industrial purposes. It is a major contributor to a packing plant’s margin.
Most of those items in the drop are exported. The domestic market is comparatively small. Tongues, for instance, are a big seller in Japan.
In the case of the current hide and offal value, the main factor affecting the total is the steep decline in the hide price, said Jessica Sampson, economist at the Livestock Marketing Information Center. Most of the decline in hide values comes from a lowered demand from China as their economy has softened.
With fewer cattle slaughtered, hide values increased significantly last year, giving the drop credit an unusual bloom as demand held relatively constant and production declined.
The US still has a tight cattle supply, but with the cow herd growing, there is light at the end of the tunnel, and prices for anything tend to soften as the outlook for larger supplies grows.
However, the larger reality for the cumulative value is that China’s leather demand has dropped off enough to affect the US hide value, Sampson said. On July 3, heavy native steer hides were priced at $96.57 per cwt, or $78.00 per piece. A year ago, these same hides were valued at $134.02 per cwt, or $108.25 a piece.
THE CHINESE ECONOMY
But since China’s economy affects the demand for US hides, it pays to take a look at that market.
China’s Gross Domestic Product for the first two quarters this year was reported at 7%, exactly on the target for the Communist Party’s needs. But first-quarter growth in industrial production was the weakest since the depths of the financial crisis, and while second-quarter numbers were better, the Producers’ Price Index continues to hover around the 50 mark that signals growth or retraction.
And second-quarter Chinese economic growth was based largely on the services sector. Some economists see this as transient since it derives a large part of its value from the soaring stock market, which boosted financial firms.
CASH CATTLE REMAIN QUIET
Cash cattle markets remained quiet Thursday with no fed cattle changing hands yet this week. Bids were reported at $146 per cwt on a live basis with asking prices at $152 to $153. In dressed-basis markets, cattle were bid at $232-$236 with asking prices holding near $243 to $245.
Plains markets last week saw a mostly steady $150 market. Dressed-basis cattle traded last week at $238 to $241, also about steady.
The USDA’s afternoon choice beef cutout value was down $0.99 per cwt at $233.95, while the select value was $230.82, off $2.89. Volume was heavy at 133 loads of fabricated product being sold into the spot market.
The CME Feeder Cattle Index for the seven days ended Wednesday was $222.92 per cwt, down $1.20, compared with the Aug settlement of $214.47, down $0.85.