Global Economic Conditions Dent Domestic Mink Consumption
After three years of moderate output increases in response to record-breaking pelt prices and strong consumer demand in China and Russia, US mink farmers are in a wait-and-see mode as the global financial and economic crisis plays out.That same crisis, meanwhile, has severely dented domestic consumption. Consumer confidence was already low during the 2007-08 winter selling season, but plumbed new depths during the winter of 2008-09 as the true magnitude of the crisis hit home.
Production Share
According to the USDA’s National Agricultural Statistics Service (NASS), output of farmed mink dipped by 1% in 2007 with 2.83 million pelts produced, down from 2.87 million in 2006. This marked an end to three years of growth during which the herd had grown by 12.5%. Also down in 2007, by 0.7%, were the number of females bred to produce kits in 2008.
Production of US mink peaked in 1989 at 4.60 million pelts. In making such a comparison, however, it must be noted that the pelts of today’s farmed mink are some 20% larger than they were just two decades ago. So in terms of area of fur fabric, production has fallen less than in terms of number of pelts.
As far as its share of global production goes, the US ranked fifth in 2008, with 5.8% of the total, according to forecasts published each October by Oslo Fur Auctions. Top spot went to Denmark with 27.2%, followed by China (25.3%), the Netherlands (8.7%) and Poland (6.2%).
Global output fell by 13.2% in 2008, to 51.12 million pelts, the first drop in a decade. But this was not because of industry-wide downsizing. Rather, it was the result of China’s production bubble bursting.
Between 1999 and 2007, world mink output almost doubled to an estimated 57.89 million, largely due to the efforts of industrious Chinese farmers.
Even in 1999, China was the world’s second-largest producer, with 3 million pelts, but it was still far behind Denmark, with 10.5 million. It then embarked on a dramatic expansion, peaking in 2007 with an estimated output of 20 million pelts, or about one-third of world production.
And then the bubble burst. Within a year, output is believed to have fallen to 13 million. Industry insiders said the expansion phase had brought on board many first-time mink farmers whose end product brought disappointing prices, causing them to cut back or shift to other types of animal agriculture.
But whatever the cause, the roller coaster ride of Chinese mink farming has had no discernible impact on other producers. Its mink pelts are generally commercial grade and do not pass through the international auction system.
Meanwhile, Denmark has again resumed its customary top position, with production in 2008 estimated at 14 million, unchanged from 2007.
Forecasts for other major producers in 2008 were: the Netherlands, 4.5 million, up 4%; Poland, 3.2 million, up 14%; the US, 3 million, unchanged; Canada, 2.3 million, unchanged; Russia, 2 million, down 9%; Finland, 1.9 million, down 10%; the Baltic States, 2 million, up 25%; Sweden, 1.45 million, down 3%; Belarus, 800,000, down 20%; and Norway, 660,000, down 3%.
With output edging up, down and sideways, no general trend stands out, but the rise of three producers bears special mention.
The Netherlands has increased output 66% since 1999, firmly establishing itself as the world’s third-largest producer.
More dramatic still has been the rise of Poland, with 700% growth over the same period, propelling it to fourth.
And the Baltic States, now tied with Russia in seventh, have seen growth of 376% over the last decade.
Productivity, Efficiency
Starting in the late 1980s, the US mink farming sector began changing its structure and means of production. The number of farms began declining, but efficiency was increasing as farms sought out economies of scale, such as merging with other farms, and pooling resources in feed and processing cooperatives. Advances in animal husbandry, meanwhile, meant that even though the number of pelts produced fell slightly, individual farms were producing more pelts overall, and more per female bred, the pelts were of higher quality, and, as previously noted, they were getting ever larger.
The number of farms continued to decline into this century, but output has remained more or less stable, even increasing of late, indicating that improvements in efficiency and productivity have been ongoing.
The statistics tell the tale. In 1987, the 1,027 farms that reported to NASS produced an average of 4,014 pelts. By 1997, only 452 farms were reporting, but average output had risen to 6,622 pelts. By 2007, the number of farms was down to 283, but average output was 9,993 pelts.
Over just two decades, the number of farms had fallen by 72%, while the number of pelts produced per farm had risen by 148% – an average annual increase of 7.4%.
In recent years, the trend has accelerated. Over the five-year period 2003-07, the number of US mink farms fell by 7%, while average pelt production per farm rose 11%.
Crop Value
Although the 2007 mink crop of 2.83 million was down slightly from the year before, the decline in output that began in 1990 and bottomed out in 2001 (2.55 million pelts) seems to have been reversed.
The recent expansion of output is the direct result of average pelt prices doubling between 2001 ($33.50) and 2007 ($65.70). Indeed, the 2007 result was the best on record, eclipsing the already stunning figure of $60.90 set in 2005. The US crop as a whole sold for $185 million, up 34% from 2006 and also the best result on record.
The average pelt price over the period 2003-07 was $52.67, up 69% from $31.20 over the preceding five years.
In light of the global economic crisis, no one expected a repeat performance for the 2008 crop, which came under the hammer this spring. NASS will not publish its data until later this summer,(1) but reports from the North American auctions were of prices down as much as 40% from last year at the opening sales, though improving somewhat as the season wore on.
Significantly, female pelts fell less than the larger male pelts, narrowing the price gap between them considerably. Females have historically been favored by Chinese and Korean buyers, who continued to give strong support. But male pelts have traditionally been popular with Russian buyers, who were notably fewer this year as a result of economic hardships and tight controls on the flow of hard currency.
If the average price drop comes in at, say, 35%, that would translate as about $43 a pelt. With the total cost for a US farmer to bring a mink to market, including auction fees, estimated at between $35 and $40,(2) this would mean that after four years of strong profits, many farmers may see 2008 as a break-even year.
International Apparel Trade
Over the last several decades, eastern Asia (in particular China) has become dominant in the manufacture of all kinds of apparel. Thus, even though the US is a major exporter of pelts, its production of fur apparel is a shadow of what it was forty years ago, making it a net importer by a large margin.
According to the Commerce Department’s International Trade Administration, the deficit in 1989, when Harmonized Tariff Schedule statistics began, for “articles of apparel etc. of furskin” (HS 4303)(3) was $286 million. The smallest deficit was in 1992 ($64.5 million), and the largest in 2004 ($314.6 million).
In 2008 the deficit stood at $136.0 million, marking the fourth straight yearly decline.
It must be noted, however, that the narrowing trade balance does not reflect increased exports (see chart), or any known increase in domestic production for home consumption. All it really indicates is falling imports.
Thus the slides of the deficit and imports both began in 2005. Within four years, imports fell from a record high of $334.1 million to $170.3 million last year.
By source, major shippers to the US in 2008 were China (44.4%), Canada (16.4%), and Italy (13.9%).
When imports first began falling, analysts attributed it to excess inventory built up by retailers following a string of profitable seasons. But their continued and dramatic slide since is now squarely being blamed on America’s struggling economy.
And with imports for the first quarter of 2009 down a further 10% year-on-year, total imports this year may set a new low for the last decade.
American exports of fur apparel are on an altogether smaller scale. In 2008 they were worth $34.3 million, down from $38.5 million the year before. In the last two decades, a high was set in 1997 of $94 million, and a low in 2005 of $18.8 million.
Major consumers of US exports in 2008 were China (21.5%), Canada (13.4%) and Italy (8.2%).
Given the smaller figures involved in the export trade, year-to-year changes can be pronounced without being significant. One deserves special mention though, since it has all the signs of a trend.
Over the five-year period 2004-08, the value of US fur apparel exports to the UK rose from a paltry $158,000 to $2.1 million. This included a jump of 142% in 2008 alone, catapulting the UK to the position of fourth largest consumer of US fur apparel.
Statistics from the UK’s HM Revenue & Customs confirm the trend, with imports of US fur apparel growing by 1,100% in the last five years.
Curiously though, over the same period the UK’s total imports of fur apparel from all sources have remained fairly constant, so the explanation for this trend is unknown.
Domestic Retail
Domestic retail in the US has followed imports downwards, though the best statistics available are not a measure of the total market. Rather, they are for sales through traditional furriers with membership in the Fur Information Council of America (FICA).
After four straight years of increases, including a new record of $1.82 billion in 2005-06, sales through FICA’s members went into decline.
In 2006-07 they fell 12% to $1.61 billion, followed by a further drop of 18% in 2007-08 to $1.34 billion.(4) In addition to sales of fur and fur-trimmed apparel and accessories, these surveys include services such as storage, cleaning and remodeling.
In stable economic times, 2007-08 might have been a bumper season for fur retail, as the winter was exceptionally cold across much of America. But consumers had bigger worries on their minds than the temperature: crude oil had passed $100 a barrel, the dollar just kept weakening, and people were talking nervously about something called the “subprime mortgage crisis”.
People were not in the mood to shop, and to judge from eBay, many fur lovers even switched to “sell” mode.
But things were about to get a lot worse.
As 2008 wore on, investments and other assets plunged in value, unemployment rose, and in September – just as the new fur season was preparing to kick off – Lehman Brothers failed, there was a run on the money market, and the global financial system shook to its roots. Then on Dec. 11, as furriers were opening their doors to Christmas shoppers, they were kicked in the teeth again with the arrest of the biggest individual investment fraudster in history, Bernie Madoff.
All the while, the combined consumer confidence index (present situation + expectations) of the Conference Board just kept on tumbling, and would not hit bottom until February 2009. In the last of the three biggest months in the fur retail calendar, the Index hit 25.0, down from 75.0 a year earlier and the lowest in its history.
In short, when domestic fur retail statistics are tallied for 2008-09, it will be truly remarkable if they have not continued their downward slide.
International Context
As uncertain as the future may be for America’s traditional furriers, the prosperity of its mink farmers is no longer dependent on the domestic market, accounting as it does for just 10% of the global total.
It is the health of the world economy with which mink farmers must now be concerned.
Until the onset of the economic crisis, the global fur market was robust and growing. Fur was firmly back on the fashion scene, while strong economic growth in China and Russia was producing matching growth in disposable consumer income.
But how quickly things can change.
Just one year after setting a new high, global fur retail fell in 2007-08 for the first time since the International Fur Trade Federation (IFTF) started compiling statistics in 1999. From $15.02 billion in sales in 2006-07, $13.03 billion was rung up in 2007-08, down 13.25%.(5)
And as with domestic retail, it would be surprising if global retail did not take another hit in 2008-09.
Since the IFTF does not publish a country-by-country breakdown of its surveys, one must rely on industry analysts to determine which national economies have been underpinning the strong prices for mink. But opinion is unanimous that Russia and China have been the driving forces.
Now a dark cloud hangs over Russia. According to a report from its Economic Development Ministry this February, the country’s GDP growth fell from a strong 8.1% in 2007 to 5.6% in 2008, and “will be close to zero” in 2009.(6)
Meanwhile, Russian buyers and their brokers have been notably few at auctions this year. Explains veteran fur reporter Sandy Parker, their “operations all year have been severely curbed by tight government control over the outflow of hard currencies. The Russian trade is understood to be deeply in debt, especially to its Greek suppliers, perhaps to the tune of about $100 million or more.”(7)
It should therefore come as a huge relief to the fur trade that China’s economic managers are doing a better job of weathering the storm.
Certainly, China has not been immune to the economic downturn. In the first quarter of this year, its GDP growth fell to 6.1%, the lowest for almost 20 years.(8) Yet even while falling exports were dragging the economy down, it reported real wage growth of 11.2% year-on-year, and falling consumer prices, resulting in strong growth in consumption.
It is this domestic consumption that analysts now say is helping turn China’s economy around. “Falling prices may lower costs for businesses and encourage consumers to spend, helping the economy to recover after exports collapsed,” reported Bloomberg News.(9)
The fur trade can also be thankful for the growing numbers of wealthy individuals in China, and their taste for high-end, investment quality goods, or “luxuries”.
By 2005, China already ranked as the world’s third-largest consumer of luxury goods, prompting analysts to predict it would surpass the US and Japan by 2015.(10) Not only does the prediction still look good, it may be realized sooner than expected.
In global terms, luxury goods sales are in a slump, according to the latest Luxury Goods Worldwide Market study, published this April by business and strategy consulting firm Bain & Co. Its current prediction is for revenues to fall by 10% in 2009. Even worse, of all the major luxury categories, apparel will be hit the hardest, declining by 15%.
But the silver lining is in the geography. While Bain sees steep declines in luxury spending in the Americas, Europe and Japan, other markets “show more promise”, and for China it actually projects growth of 7%.
Fuelling this growth will be the burgeoning demographic group of high net-worth individuals. The number of Chinese individuals worth $1.5 million or more will grow by 6% in 2009, projects Bain.
Rapid recovery in China and other emerging markets, and the continued creation of new wealth, will play a vital role in helping mink farmers – and everyone else – survive these troubled times. Such is the new, global economy.
NOTES:
(1) Mink statistics, National Agricultural Statistics Service, USDA, released July 10, 2009. (PDF format)..
(2) Sandy Parker Reports, Apr. 27, 2008.
(3) Chapter 43 of the US Harmonized Tariff Schedule, of which HS 4303 is a part, does not include all items of fur apparel. The Fur Products Identification Act lists sheep as among the species yielding fur. However, for the purpose of the HTS, sheepskin jackets, for example, are covered by Chapter 62 (apparel articles and accessories, not knit etc.), while sheepskin boots come under Chapter 64 (footwear, gaiters etc. and parts thereof).
(4) See “US fur retail sales hurt by economic concerns in 2007,” Fur Commission USA press release, Nov. 20, 2008.
(5) See “Global fur sales show relative stability despite economic downturn,” International Fur Trade Federation press release, Mar. 27, 2009.
(6) RIA Novosti newswire, Feb. 3, 2009.
(7) Sandy Parker Reports, June 1, 2009.
(8) Country Forecast China, Economist Intelligence Unit, June 9, 2009.
(9) “China’s consumer prices fall for third month on food,” Bloomberg News, May 11, 2009.
(10) “China becomes the world’s third largest consumer of luxury goods,” Ernst & Young China, September 2005.
