January 25, 2013

 

Societe Generale lowers corn futures' forecast

 

Societe Generale renewed a forecast of falling corn futures as demand from livestock feeders was not as resilient as it appeared.

 

A bigger-than-expected drop in US corn inventories in the three months to December 1, which has been a major support to prices, has been widely attributed to demand from livestock feeders proving more resilient than had been thought.

 

Consumption by other major sources, ethanol plants and importers, is more easily tracked on a week-by-week basis. However, closer analysis suggests that "rationing is indeed occurring in this [livestock] demand category" too, undermining the case for higher corn prices.

 

Demand for feed from cattle feedlots, which typically house animals for six months, looks set for a decline as the impact of falling rates since August of take-ins of animals for fattening feeds through.

 

"It stands to reason that a more pronounced drop in feed usage will be observed later in the marketing year, particularly in the March-May and June-August quarters," SocGen analyst Christopher Narayanan said.

 

In poultry, "chick placements are expected to continue at muted levels", without an additional rise in chicken prices to offset higher feed costs.

 

Meanwhile, in the pork sector, while "efficiency gains have helped keep production high, lower feed demand from the hog industry over the last few years has been a key theme.

 

"The breeding herd remains historically low, as producers have cut back since the high grain prices seen in 2008," Narayanan said, forecasting "continued rationing in the hog industry".

 

While livestock producers may have been slower to ration corn than importers or ethanol producers, "we maintain that the biological lag involved in raising animals is the root cause of this seemingly slow response," he said.

 

"Barring any repeat of last year's supply shocks in either South or North America, we continue to expect corn prices to trend lower into year-end."

 

The comments contrast with some other observations of livestock demand for corn. RJ O'Brien analyst Richard Feltes said that "in the critical feed sector, we do not have any evidence of reduced feeding, given a slight uptick in poultry numbers and anecdotal reports of stable-to-higher hog production, in addition to on-going high rates of domestic meal usage".

 

The USDA in a report last week highlighted elevated cow liquidation rates - which are close to the 25-year high 17.1% of inventory reached in 2011 - and flagged a small decline in chicks placed for growing into broiler chickens. However, it highlighted as an "important" finding "that US [pig] breeding inventories have not declined, despite very high feed costs.

 

"In the current market environment of high feed costs, the breeding herd could have been expected to decline," USDA analyst Rachel Johnson said. "The fact that it did not suggests that pork producers are assuming that high feed costs are temporary, and that pork demand in 2013 will continue strong."