October 18, 2010

Supply squeeze to revive US hog prices

The decline in US hog markets, driven to its lowest in nearly eight months, may represent a buying opportunity, as a reluctance by farmers to expand herds squeezes supplies, Goldman Sachs said.

The bank said that it was "most constructive" in terms of livestock prices on live cattle-those ready for slaughter, of which supplies will dwindle as higher grain prices are likely to prompt cutbacks at feedlots.

However, Goldman's forecasts implied greater juice for investors from buying up lean hogs, for which prices will hit 85 cents a pound in a year's time compared with the 75.80 cents being factored in by futures for October 2011 in morning trade in Chicago.

The spot price of lean hogs stood at 68.90 cents a pound, after touching 68.55 cents a pound earlier, the lowest for a near-term lot since February. Hog prices often slip in the autumn, as the end of the barbecue season depresses demand for pork, with higher animal weights adding to selling pressure.

However, while noting price seasonality, analysts stressed USDA data last month highlighting farmers' "reluctance" to expand herds.

Specifically, the USDA reported that sows held for breeding at the start of September were 1.8% below last year's level, consistent with the recent strength in feed prices, which has eroded producer margins.

Analysts believe that this pattern is expected to continue, with expectations of lacklustre growth in farrowings, also stressing the potential for high grain prices to prompt farmers to sell animals at lower weights.

Meanwhile, in cattle, Goldman forecast prices average 105 cents a pound for the next year, a small premium to the spot price and in line with October 2011 futures.

Live cattle prices have enjoyed an October rally, with the market struggling to show a seasonal decline while the number of animals on US feedlots, and indeed the size of the domestic herd, around multi-year lows, yet while demand is robust.