Live cattle price rally not over yet, says SocGen

06.06.2017

The rally in cattle prices this spring, termed by one commentator "one of the biggest on record", may not be over yet – as long as beef values can hold their ground, Societe Generale said.

The bank lifted by up to 13 cents a pound its forecasts for Chicago live cattle futures, on a quarterly average basis, saying the upgrade as needed "capture stronger beef demand and retail prices".

Indeed, futures have soared nearly 40% from a six-year low set in October, led by cash prices which have shown even bigger gains, undertaking a rally termed by livestock experts at Steiner Consulting as "one of the biggest on record, fed by improving export buying and domestic consumer appetites".

Still, the SocGen forecasts factored in potential for further price gains yet, with the bank seeing values in the October-to-December quarter average at 125 cents a pound, ahead of the 121.40 cents a pound at which December futures are trading at.

"We believe demand for cattle might remain strong," said SocGen analyst Rajesh Singla.

Beef dynamics

However, key to this dynamic was the strength of beef prices, which have hit their highest in nearly two years as measured by the "cut out", or wholesale value.

And there is hope for beef values remaining elevated, thanks in part to enriched US consumers, with the bank noting that the "US unemployment rate has fallen back to 2007 levels.

"An improving macroeconomic environment in the US and increasing per capita disposable income should keep demand for beef healthy."

Meanwhile, US exports should "remain strong amid quality issues in Brazil and the reopening of Chinese market for US beef".

Furtherore, the "concentrated structure of the meat packing industry", following capacity cuts by the likes of Cargill in recent years, "might continue to restrict the downside potential in beef prices".

"Demand for cattle might remain strong as long as beef prices remain supported by demand and concentrated structure of meat packing industry."

June swoon

The comments come at a key time for the beef values, which have a habit of retreating in early June with the passing of the key demand events of Mother's Day and Memorial Day.

In "choice" beef, the more expensive grade than so-called "select", price trends tend to "pick up downward momentum", Steiner Consulting said.

"The average weekly change in value for the first week of June has been 3 cents a pound," with 2015 witnessing a 9-point drop.

However, the group also flagged that the cattle futures market had some cushion from this "much-anticipated" trend, with prices having kept an unusually large discount to cash values, a gap which, June basis, reached $12 per hundredweight in mid-May.

The average discount is about $6.43 a bushel in mid-May.

Hog price prospects

SocGen also lifted its forecast for Chicago lean hog futures, by up to 9 cents a pound although, forecasting prices averaging 60.0 cents a pound in the October-to-December quarter, indicating less scope for price gains.

December futures are valued at 63.05 cents a pound.

However, the bank noted supportive trends from a number of sources, including a relatively high beef-pork price ratio, "delayed" recovery in Chinese hog output "due to environmental issues", and "restricted" US hog weights.

"Farmers' share in retail pork value remains at near historical low levels, which should continue to restrict the pace of supply growth," Mr Singla said.

"Slaughter growth should outpace pig crop growth in 2017."


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