February 1, 2012

 

US 2012 cattle prices to rise on shrinking herd

 

 

Due to a devastating drought and high feed costs, US live cattle futures will increase to new highs this year because the herd has been shrinking, signalling more pain for beef lovers already paying record high retail prices.

 

Prices for futures at the Chicago Mercantile Exchange are expected to rise 8% by the end of this year from a year earlier to a record high as the smallest herd in 60 years sparks a scramble for supplies fuelled by strong export demand.

 

Analysts said any plans by ranchers to expand herds would add to the market's bullish momentum as they retain their heifers -- young cows that have not given birth to calves -- for breeding instead of fattening them for slaughter.

 

But projected price gains will be less pronounced than the 13% jump last year or the 25% advance in 2010 as higher prices for three years in a row curb demand or cause consumers to switch to cheaper pork and poultry.

 

"Supply-wise we're going to have big deficits by then (the end of the year). The only question will be the footing of the economy and the price resistance (from higher beef costs)," said Joseph Ocrant, president and analyst with Oak Investment Group.

 

"We could be down as much as 8-10% from the previous year in total cattle on feed. We're at 60 year lows already in total cattle population," he said.

 

The low cattle inventory was expected to help drive beef prices up 4-5% this year after they rose 10.2% in 2011, according to a forecast by the USDA's Economic Research Service.

 

Global food prices were expected to ease in 2012 but not drop drastically from record high levels in mid-2011, the UN's Food and Agriculture Organisation said this month.

 

Spot live cattle futures on the Chicago Mercantile Exchange were forecast to rise to US$1.3294 per pound, according to a poll of eight analysts, up 8% from the 2011 closing price of US$1.229. The range of estimates was from US$1.15-1.51. Spot futures hit a record high of US$1.26735 per pound this month, a level analysts said could be bested by a seasonal upswing this spring, and perhaps again in the fall.

 

"You'll see a nice move up this spring then a seasonal pullback into the summer. Assuming we raise a good corn crop and everyone's feeling better about the pasture conditions, I think things get really tight and the market moves up into the fall timeframe," Dennis Smith, broker and analyst with Archer Financial.

 

Texas, the largest US cattle state, and several surrounding states have seen their cattle populations drop this year as producers culled more animals, including breeding cows, or shipped cattle to more promising grazing areas. If the drought eases and pastures are revived, analysts expect a strong effort to rebuild the cattle herd, which will mean fewer cattle on feed and higher prices this year -- as more heifers are withheld from the market.

 

"The cow slaughter was up over 4% even though we have record prices. You'd think the cow slaughter would slow down, but the drought forced a lot of liquidation," said Ron Plain, livestock economist with the University of Missouri.

 

"Assuming more normal weather and better rain in the southern Plains, we'll grow more grass and the cow slaughter will slow down a lot this year," he said.

 

Whether US consumers will pay higher prices for beef is unclear. Signs that the US economic recovery was gaining traction could boost restaurant traffic or prompt consumers to pass up cheaper pork and poultry in favour of beef. But if the euro zone debt deepens and spreads, US consumers could tighten their purse strings.

 

Export demand growth appears more promising amid a generally weak dollar and rising demand in Asia. Analysts expect stronger demand from Japan, a major US beef importer, as Tokyo may ease an age restriction on US imports that has been in place since 2003 when mad cow disease was discovered in a US herd.