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There’s a new skin in the game, and the cattle industry is being turned on its head. A new generation of bio-based materials is changing the existing leather trade, which could have major knock-on effects for cattle farming – not only with mammoth environmental implications but economic ones, too.
The inefficiencies inherent in the leather industry mean that operating margins are narrow by nature – and, in light of current volatility in the cattle industry, even a small drop in demand or revenue will have monumental ripple effects on the wider market.
But what exactly would the impact be, and who would be affected?
Worth USD 80 billion today, the leather industry is one of the largest manufacturing sectors among animal-derived textiles, with exports of hides and skins alone exceeding USD 5 billion annually. The products derived from the material are even more valuable – the annual global leather goods market was valued at almost USD 400 billion as of 2020.
Bovine leather makes up about 65 percent of the global leather market. The primary raw materials are hides which are waste products from the meat processing industry.
But the industry is plagued by inefficiencies. Hides are limited in size, and quality is highly variable, leading to a high proportion of waste- around 30-40 percent of a cowhide by area and almost 80 percent by weight is lost in some cases. The inconsistent quality also means hides are graded from A to E (best to worst), with only 2-4 percent of hides being graded A, and A-grade hides often sold out years in advance – exacerbated by the long production times ingrained in the industry.
The issues continue: in addition to a low-margin, and highly fragmented supply chain, the processing of hides requires significant amounts of water and can produce toxic waste effluent.
What’s more, the recent geographical mismatch between the desire for meat and that for leather means that in some regions, cows are being bred primarily for their hides, while in others, the hides are discarded.
Already, a new generation of alternative, bio-based products has taken the food world by storm. These options are helping to drastically reduce meat and dairy consumption in many markets.
Plant-based material alternatives, derived from sources ranging from pineapple leaves to fermentation processes and cellular agriculture-based products, promise potentially similar disruption to the use of animal-based fibers such as leather. Importantly, these technologies also offer the potential to avoid many of the pitfalls of bovine leather, such as the variable quality and limited size of hides.
Because animals have a fixed composition, farmers and meatpackers can’t adjust production to compensate for different patterns of demand. This means changes in supply or demand of one part of the animal impact the economics of all the other parts, even if the products are supplying different industries. Rapid changes in demand due to the sudden uptake of alternative technologies threaten the economic stability of what are already volatile markets.
For instance, if leather is widely replaced by a next-gen material, the cost of the cow falls on fewer components that are still in demand. Reduced demand for cattle hide would mean a 2-5 percent drop in the amount of money earned per animal, meaning beef and dairy prices would have to rise, leaving meatpackers with damaged margins.
For investors, this represents a significant crossroads, and the path they choose will have huge ESG implications – whether they are ESG investors or not. Once they determine for themselves whether this disruption will have significant implications, they must decide which technologies are likely to be the winners. Which technologies bring bigger benefits, and which perspective should be prioritized – price, technology, or environment?
Next-gen leather represents a significant opportunity to move away from bovine leather and the deforestation implications that has, as well as from faux leather, which has come to comprise about two-thirds of the overall “leather” market by volume and a third by value but is predominantly made from plastic, derived from fossil fuels and contributing to microfiber pollution.
Many of the next-gen materials are bio-based and so do not come with the downsides of fossil-based materials – but they still require raw materials which often rely on finite sources. How these are used, in what quantities, and where will be crucial.
Investors must consider the greater implications of these next-gen materials on existing markets. While the leather industry is globally diverse, next-gen leather can be produced anywhere, and investors must carefully consider how they will manage a just transition.
Undoubtedly, these next-gen materials represent a huge opportunity, both for investors and the world – but the financial community must consider the systemic implications today and manage them strategically, rather than taking a wait-and-see approach and risking letting a once-in-a-lifetime opportunity to facilitate significant change slip through their fingers.
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