The value of all by-products that come from the beef carcass is rising and is almost back up to a year ago, but weak hide prices are holding the cumulative total back.
The low value of hides is problematic for beef packers because the by-product values often are where the company makes money on slaughtering and processing cattle. This isn’t thought to be the case currently as many market analysts calculate that packers should be making big bucks on the meat alone.
The total by-product value is referred to in the industry as the drop credit and can be thought of as everything that drops off the carcass before it is cut or ground up into steaks, roasts or hamburger. Products that come from some of those by-products are soap, gelatin, gum, fruit snacks, burn ointments and leather goods, including footballs.
WHY HIDES ARE IMPORTANT
On average, by-products make up about 10% of the value of the fed cattle beef packers buy, slaughter and process, said Derrell Peel, Oklahoma State University agricultural economist, in an article for Drovers.
And hides, on average, make up about 50% of the drop credit. The correlation between hide values and the total drop credit is so tight that analysts often assume the drop credit is moving up or down only with the value of hides.
But that’s not the case now. Currently, many hides have no value, market analysts said. There are more hides than the world wants, so the market is being selective in which hides get processed into leather.
In many cases, hide values have dropped below that of some of the other by-products and lesser cuts.
WHY, THEN, IS THE DROP RISING?
The drop credit is rising because the value of some of the other products is rising a little.
Average monthly values for tongues, for instance, have gone up. In June, the average USDA value, as compiled by the Livestock Marketing Information Center, rose to $11.86 each from $9.26 a year earlier. This is a $2.60, or 28.1%, jump.
However, that’s not the whole story for tongues, or other by-products. With tongues, that $11.86 can be seen as the bottom edge of where they should be. Prices from 2013 through 2017 were closer to, or above, this level, and the 2018 and early 2019 prices.
KEY FOREIGN TRADE DOWN
Census Department trade data would seem to indicate the problem is reduced trade with key countries like China.
The US processes a low percentage of the hides it produces because strict environmental laws make it too expensive, a market analyst said. As a result most are sold to China or South Korea for processing and use in products like shoes, clothing or car seats.
But other news stories have said leather demand is down as consumers opt for other fabrics.
CATTLE, BEEF RECAP
Light cash cattle trade was reported this week at $106.50 to $108 per cwt on a live basis, steady to up $1.50 from last week. Dressed-basis trade last week was at $175, up $3 to $5.
The USDA choice cutout Wednesday was down $3.80 per cwt at $232.96, while select was up $1.10 at $211.81. The choice/select spread narrowed to $21.15 from $26.05 with 90 loads of fabricated product sold into the spot market.
No cattle were tendered for delivery against the Aug contract Wednesday.
The CME Feeder Cattle index for the seven days ended Monday was $138.62 per cwt, up $0.24 from the previous day. This compares with Wednesday’s Aug contract settlement of $138.75, up $0.20, and the Sep contract settlement of $132.85, down $0.92.