REVIEW OF THE GLOBAL OSTRICH INDUSTRY - MARCH 2008:

Introduction

In my Market Review of March 2004, I predicted a drop in supply of ostrich leather along with increased prices, that would trigger the next bull phase for the ostrich Industry. This forecast has subsequently materialized. It was, however, interpreted by many as “crying wolf” in an attempt to artificially trigger price increases to farmers and manufacturers.

To enable all participants to make timeous decisions, it is important to understand the following underlying factors causing the present short supply of ostrich skins. These should last for several years.

1. BACKGROUND

Ostrich Leather prices increased from US Dollar 8.00 per sq ft for first grade in 1981 to an all time high of US Dollar 42.00 per sq ft in October 1993. During this bull phase many new farmers entered this lucrative industry, resulting in an oversupply of slaughter birds and a global proliferation of abattoirs and tanneries. Hardly any new markets were developed and new processors were forced to drop price and grading norms to maintain market share. This development triggered the first bear phase in the Industry since 1993, with prices tumbling to a low of US Dollar 10 per sq ft for grade 1 in certain markets (October 2003) – a drop of 75%.

As a result, distributors and manufacturers reduced their inventories to “just in time” levels in anticipation of further price reductions. This tendency resulted in stockpiling of skins at tanneries, putting their cash flow under even greater pressure.

2. WEAKENING OF THE SA RAND AGAINST US DOLLAR

What further stimulated the downturn in price for finished leather was the continuous weakening of the SA Rand from Rand 4.50 in 1996 to Rand 13.00 against the US Dollar in January 2002. A drop of 65%.

Instead of sharing the advantage of the exchange rate among ostrich manufacturers and producers, South African processors only discounted their selling price for finished leather to distributors and manufacturers.

3. STRENGTHENING OF THE SOUTH AFRICAN RAND

The last straw for many farmers then came when the S.A. Rand strengthened from Rand 13.00 (January 2002) to Rand 6.75 against the US Dollar (January 2004) – a difference of 48%. The market again resisted increased prices by processors during 2002/03. In order to survive, processors simply reduced their purchase price of raw skins to already crippled farmers, forcing many to slaughter their breeding stock.

4. BOOM / BUST PHASE

The above illustrates that the cycle from “boom to bust” in the SA Ostrich Industry (October 1993 to October 2003) took approximately 10 years. It could safely be assumed that the cycle from “Bust to Boom” could also take another 10 years. The next 5 years should therefore experience an increased demand for ostrich leather.

5. PRODUCTION CYCLE

Along with the above, one needs to understand that the production cycle of a slaughter bird is approximately 24 months i.e. skins that are presently being sold are a combination of the 2005/06 chick season. The first chicks of the 2005 season hatched during August 2006, while the last chicks hatched during April 2006. These last chicks were only slaughtered 13/14 months later (May/June 2007), and skins tanned and finished towards end of 2007.

Skins from the (down sized) 2006/07 season will likewise only be sold during 2008/09 and will be in much shorter supply due to the said disinvestment by ostrich farmers.

6. SHORT / MEDIUM SUPPLY FORECAST

The expected upswing in prices, which has already started, should further escalate during 2008. Because of the poor cash flow of certain tanneries, substantial price increase will only filter through to farmers towards 2009. Farmers who might at that stage be influenced to enter ostrich farming, will only do so during the 2010-breeding season.

As thousands of breeding birds were slaughtered over the past few years it will take farmers another 3 years (i.e. up to 2012/13) to raise breeding birds to maturity for egg/chick production. The next possible over supply of ostrich skins should therefore only start from 2014.

7. PRICE FORECAST FOR 2008

In certain markets it was common to sell ostrich leather per skin instead of per sq ft. This tendency unfortunately damaged the image of ostrich leather. Prices in certain markets have however recently increased to US Dollar 250+ per skin and all indications are that it could shortly reach USD 300, equating to roughly US Dollar 100.00 for a pair of boot vamps.

At the present exchange rate of South African Rand 8.00 per one US Dollar, a selling price of US Dollar 250 equates to Rand 2000 per skin of 16 sq ft.

As farmers only get paid around 70% of the selling price of finished skins (after processing and marketing costs) the following average FOB price structure needs to be achieved per sq foot to create viability and ensure a consistent supply. Grade 1st 2nd 3rd 4th USD Price per sq ft 18.00 16.20 14.50 13.00

At a grading mix of 25 / 25 / 30 / 20 this price structure equates to ±US Dollar 255.00 per skin which is substantially lower than Nile crocodile. 70% of the said selling price will allow farmers US Dollar 178 in their pockets. At the present exchange rate of Rand 8.00 per US Dollar this equates to Rand 1,400 per skin (in line with prices paid to farmers before deregulation October 1993).

8. CONCLUSION

Considering the above it is not expecting too much from processors, distributors, manufacturers, wholesalers and retailers to accept the above realities by working together towards creating a more sustainable ostrich Industry for all participants to share in on a proportional basis.

9. OPSA’S POSITION

Ostrich Products South Africa kept a low profile the past few years by selling its raw skins mainly to Klein Karoo International. We have, however, kept close contact with the market through continuous liaison with manufacturers and distributors. Since the upswing, we now feel comfortable to announce our re-entry into the Global Market. It is commonly known in the Industry that OPSA, as a member of the Saag Jonker Group, is still the largest privately owned vertically integrated Ostrich farming and distribution group in the world. OPSA’s President, Mr. Saag Jonker, started his career in the Ostrich Industry(1959) and has a track record of 46 years.

10. To those accepting the above realities, it would be advisable to timeously place orders with their suppliers of choice, of which only a handful can still guarantee continuous supply.

For any further information, please feel free to contact us.

Kind regards

SAAG JONKER
President