Darrell, this is an excellent example of how the Asian problem is spreading, interesting too... you can see how inflation can be put on hold in many areas. From the Los Angeles Times...
"Friday, December 26, 1997
Web of Trade Ties Spreading Asian Troubles Within the
U.S.
Economy: The region's financial woes are having an impact in this country
on everything from tech-stock prices to sales of beef and cotton.
By EVELYN IRITANI, Times Staff Writer
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rom his office in Englewood, Colo., Andrew Gottschalk can
track the Asian financial crisis as it works its way through
America's cattle ranches and meat lockers.
South Korea's credit crunch has left its food companies and
shoe manufacturers short of money, which has prompted them to
cancel or delay orders for meat and hides and put a freeze on new
contracts.
The meltdown in that Asian economy, the third-largest customer
for U.S. beef products, has created a backlog in West Coast ports
as meat and hide containers sit, awaiting letters of credit before they
can be put on vessels.
Cattle are starting to back up in slaughterhouses across the
Midwest.
And the value of hide and offal has dropped $12.50 per head
this year largely due to the problems in Asia, according to
Gottschalk, a market analyst for Linnco Futures Group, a
commodity futures trading company.
Japan and South Korea account for 72% of U.S. beef exports
measured by value.
"We've seen a definite slowdown in orders to the Pacific Rim
develop over the past 30 days as a result of the crisis in Japan and
Korea," Gottschalk said. "It has a ripple effect all the way through
the value of cattle back to the rancher."
While economists await the hard signs of just how much Asia's
troubles will weigh down the global economy in the coming year,
the impact of the region's painful contraction is already infecting the
U.S. economy in ways large and small.
The Asian contagion--which has shaved more than 50% off the
stock and currency values of some countries--is spreading in the
U.S. through a web of trade ties that stretch from chip factories on
the Malaysian island of Penang to computer stores in Fresno, from
cattle ranches in Wyoming to shabu shabu restaurants in Tokyo.
Asia's double-digit growth of the last decade didn't just mean
more sales of Boeing planes and Caterpillar earthmovers. It also
translated into big bucks for high-fashion boutiques along Rodeo
Drive, theme parks and Las Vegas casinos that catered to the
big-spending Asian tourists.
The evidence of Asia's implosion is also being reflected in the
volatility of U.S. technology stocks, sagging beef and cotton prices,
even the dwindling number of California sea urchin divers.
Particularly vulnerable are U.S. technology companies, which
have enjoyed double-digit expansion in sales of software and
hardware to Asian economies trying to leapfrog into the 21st
century. Growth prospects in Asia--which accounts for about
one-quarter of PC sales and almost half of semiconductor
sales--were a major reason why tech stocks were so buoyant in the
U.S.
Earlier this month, the stock of Oracle, the giant Redwood City,
Calif., software firm, lost nearly one-third of its value after it
reported lower-than-expected earnings due in part to a slowdown
in sales in Asia. The stocks of other bellwether tech companies,
including Intel, Hewlett-Packard and Motorola, also have been hit
as the Asia carnage spread.
The problems of South Korea, which produces nearly one-third
of the world's memory chips, are felt all along the technology chain.
Its giant chaebol, or conglomerates, have been major customers for
companies such as Applied Materials, which sells 60% of its chip
equipment in Asia. Lattice Semiconductor Corp. (
), a chip maker, recently announced the bankruptcy of its
South Korean distributor.
South Korea's chip woes are a tangled web. The South Korean
semiconductor makers that survive have seen their production costs
drop dramatically, thanks to its weakened currency, the won. That
put downward pressure on global semiconductor prices--bad news
for chip makers like Intel but potentially good news for computer
makers like Dell.
Yet any gains from chip prices could be offset by lost sales in
Asia--which is why Dell forecast an earnings slowdown last week.
"This Asia problem is going to drive . . . probably the worst
calendar fourth-quarter earnings season that we've seen in the past
three or four years," said computer industry analyst Peter Swartz at
Salomon Smith Barney Holdings Inc.
* * *
In central California and across America's heartland, ranchers
and meatpackers are bracing for a double whammy as a result of
the regional currency devaluation and slumping appetites in Japan
and South Korea.
"We're all nervous," said Bruce Berven, executive director of the
California Beef Council, based in Foster City.
Overall sales to Japan for 1997 are down 25% over last year,
and exports of variety meats such as liver, tongue and oxtail have
plummeted 57%.
"I think we're in for about two years of tough sledding for our
sales into Asia Pacific," said an official from one national meat
association.
At the same time, the U.S. meat industry faces stepped-up
competition from Australian and New Zealand meat exporters who
are marketing their products more aggressively in Asia and the
United States. They have the edge because their currencies have
not strengthened as much as the U.S. dollar in Asia.
This scenario could ultimately lead to a decline in meat prices
here in the United States, according to Chuck Lambert, chief
economist for the National Cattlemens' Beef Assn.
"To the degree that product ends up here instead of Asia, it will
provide lower beef prices for consumers than they otherwise would
have had," he said.
Omaha Steaks, a $180-million Midwest meat company, had just
begun developing a market for its top-grade Angus beef steaks in
restaurants and hotels in the Philippines. But the Omaha-based
company has decided to put its Asian expansion plans on hold and
place more attention on expanding sales in the United States.
* * *
For producers of other products, finding alternative markets isn't
a choice. Asians are the chief consumers, or in rare cases the only
buyers, of products such as certain internal animal organs or exotic
seafood.
Take sea urchin roe, a pricey delicacy harvested off the coast of
North America and sold exclusively to Japanese sushi bars and
seafood markets.
When the Japanese were flush with cash in the 1980s, Tokyo's
famed Tsukiji Market, a giant seafood auction market, sold 25,000
trays of sea urchin roe a day. Now, the daily sales of urchin roe at
Tsukiji have dropped by more than half.
California diver Bruce Steele faces the same risks he always has
in braving the capricious currents of the sea urchin beds off the
Channel Islands. But the price his sea urchin fetch has dropped by
at least a third, thanks to the financial troubles of the Japanese.
This plunge in income has forced many of California's 492 urchin
divers to look for work elsewhere, particularly since there is little
hope that Japan's ailing economy will turn around soon.
"In tough times, you lose people, friends disappear," said Steele.
"And you just hope you make the cut every year."
California ranks among the nation's top four seafood producers
and exports more than $80 million worth of fish and shellfish a year,
primarily to Asia. Diane Pleschner, manager of the California
Seafood Council, predicts some of the state's smaller seafood
exporters will not make it through the coming year.
Other fisheries whose prices have been heavily impacted by
Asia's woes are sablefish and lobster. That squeeze gets passed on
down the line to seafood processors, fishermen and divers, boat
and fishing equipment manufacturers.
* * *
Out in California's San Joaquin Valley, cotton grower Charles
Fanucchi is watching Asia's economic woes with great concern.
Already, he has lost any hope for good returns from this year's
crop, given the problems suffered by Asian countries with large
apparel and textile manufacturing operations.
"There are very few farmers that will be generating any profit at
the prices we're talking about today of 72 cents per pound for San
Joaquin Valley cotton," said the second-generation farmer, whose
family has been working the land since 1915.
Faced with reduced demand from Asia's slowing economies,
California farmers will be planting 10% to 20% less cotton this
coming year, according to Tom Smith, president of Calcot Ltd., the
big farmer cooperative and cotton seller based in Bakersfield.
In recent days, cotton traders have pushed cotton futures prices
to a five-year low based on concerns about the buying power of
South Korea, the third-largest market for California cotton, and
Indonesia, the fourth-largest. China, the leading purchaser, is also
fighting to keep its economy on track and has canceled several large
cotton orders in recent weeks.
Fanucchi, whose family farms more than 1,000 acres near
Bakersfield, has already reduced his cotton acreage for the coming
season.
* * *
Almonds, a leading alternative to cotton planting in the San
Joaquin Valley, are also heavily dependent on sales to Japan, South
Korea, Taiwan and Hong Kong. Blue Diamond Growers, the
state's largest almond cooperative, said it is stepping up its search
for new markets, particularly in the former Soviet bloc, to cushion
against the slowdown in Asia.
Japanese food manufacturers purchased 42 million pounds of
California almonds in the last year, second only to Germany.
"About 70% of all our shipments go outside the United States,
so economic disturbances on the scale we're seeing in the Pacific
Rim are of great concern," Blue Diamond's Ian Erridge said.
Among the hardest hit will be those U.S. exporters whose
products are viewed as luxury items, such as Washington apples, a
popular holiday gift item in Asia. Exports have fallen nearly 40% in
recent months. In Thailand, where sales have plummeted to less
than half of last year's level, the cost of an imported Washington
apple has gone up 70% because of price increases and the weaker
currency.
Desmond O'Rourke, head of an agricultural export center at
Washington State University, said Pacific Northwest farmers are
just beginning to understand the ramifications of this regional crisis.
They have diversified their exports in recent years, particularly to
Latin America, but now realize that even those markets aren't
immune to the Pacific contagion.
"When Mexico went down, it was quite easy to divert product
to Taiwan," O'Rourke said. "But here you have a sequence of
markets that are hurt. And I don't think [the farmers] quite caught
up with the magnitude of the problem."
* * *
In theory, the good news about currency devaluations in other
countries is that their products should become cheaper for
Americans. And Asia's economic problems are already translating
into lower prices for some U.S. consumers.
Potentially the most significant impact could be at the gas pump.
Roger Diwan, director of global crude oil markets for
Washington-based Petroleum Finance Co., predicts the reduced
appetite in Asia will push down crude oil prices $3 to $4 a barrel
next year. Asia, which imports most of its oil, has been the primary
engine for growth in world crude oil demand.
"This should have a good impact for economies like the U.S.,
which are quite sensitive to energy prices," he said. "Even if it affects
the big oil producers a little bit [because of the drop in oil prices],
there will be a 15% decrease in the total energy bill."
In addition, South Korea's credit squeeze could lead that
government to sell off some of its 55-million-barrel crude oil
stockpile next year, which would further depress global oil prices,
according to Lawrence Goldstein, president of the Petroleum
Industry Research Foundation in New York.
Then again, declines in raw material prices don't always filter
down to consumers--whether due to the sticky fingers of
middlemen or to conflicting pressure of other costs.
Take that platinum necklace you've been eyeing. Platinum prices
on the spot metals market have dropped to a 4 1/2-year low,
primarily due to the reduced buying power of Japan, which
consumed 37% of that precious metal last year--mostly in the form
of jewelry.
But don't expect the price of platinum jewelry to fall, said Aran
Murphy, an economist for Platinum Guild International, a trade
organization. The raw material costs are far outweighed by the price
of labor, distribution, advertising and marketing, he reported. |
