July 18, 2012

 

Goldman reduces forecast of hog and cattle futures

 

 

Decline in US hog and live cattle futures might continue due to the effects of rising grain prices on the industry, according to a Goldman Sachs forecast for prices until 2013.

 

The bank cut its forecast for Chicago lean hog futures from US$0.95 a pound to, on a three-month horizon, US$0.79 a pound and, on a six-month timescale, to US$0.76 a pound, on a spot contract basis.

 

If the forecast is realised, that would represent the lowest price for a spot contract in two years.

 

The downgrade reflected the high feed prices, lifted by the grains rally, which "have pushed margins sharply lower, with current losses likely generating some herd liquidation and sow culling in coming months", Goldman said.

 

"This increase in pork supply will likely weight on prices," offsetting the boost to values from exports set to rise 4.1% this year, on USDA estimates, and from lower carcass weights, as farmers hold back on feed.

 

University of Illinois calculations last week showed costs of pork production reaching a record high of US$72 per hundredweight for the July-to-September quarter, meaning losses of about US$20 a hundredweight, which look set to continue into 2013.

 

"Losses in animal industries will be enormous over the next year," University of Illinois agribusiness economist, Chris Hurt, said.

 

Indeed, Goldman also cut its forecast for short-term live cattle prices, citing the pressure from higher supplies as ranchers liquidate herds in the face of high feed prices, with pasture conditions too poor, in turn a factor in squeezing hay supplies.

 

Beef supplies for the rest of 2012 will also be boosted by the swelling numbers of younger cattle being placed on feedlots for fattening, with imports of animals from Mexico and Canada "likely remaining strong as well".

 

Furthermore, on the demand side, the US faces a drop in beef exports, due largely to a stronger dollar, with the USDA forecasting a 7.2% drop to 2.588 billion pounds in US shipments this year.

 

Chicago's spot futures in live cattle, animals ready for slaughter, will stand at 115 cents a pound on a three-month horizon, the bank said.

 

However, taking a one-year outlook, prices of both lean hog and live cattle futures stand to recover, as the herd liquidation under way for now leaves a hangover of smaller supplies ahead.

 

For hogs, "drought-induced liquidation will curtail farrowing points to flat hog supplies in 2013 and should support prices on a 12-month horizon", Goldman said.

 

For live cattle, larger placements on feedlots for now "will curtail the already limited availability of calves this fall, with fed weights likely to decline on high feed costs and further contributing to a decline in beef production".

 

The revised price outlook follows upgrades recently by the bank to its hopes for corn, soy and wheat futures, thanks to the impact of drought in curbing US production of row crops.

 

The rally in the grains continued, amid expectations for further hot and dry weather in the Midwest.

 

Corn for December rose 4% to a contract high of US$7.72 a bushel, with soy for November setting their own contract high, of US$15.94 a bushel.

 

Wheat for September, in its first day as the spot contract, soared more than 3% to US$8.76 a bushel, the highest for a near-term lot since February last year.