SocGen sees cattle rally cooling, as feedlot margins improve


The recent sharp rally in US cattle prices is set to stabilise, Societe Generale said, as it downgraded its outlook for live cattle futures to neutral.

July live cattle futures have risen by some 10% over the last week, to contract highs.

But Societe Generale suggested that improved cattle margins would keep prices steady in coming months, despite continued brisk beef demand.

"After a strong performance since October 2016, we downgrade our bullish view on cattle prices to neutral and believe that cattle prices are fairly valued," the bank said.

Shortage of slaughter ready cattle

The strength in cattle futures, particularly those in nearby months, has been driven by brisk consumer demand, at a time when there is a shortage of cattle ready for slaughter.

"Cash cattle prices surged last week as packers chased limited supplies of market-ready animals," said Steiner Economics this week.

But that surge in cash prices is encouraging higher placements, which will feed through to higher numbers of slaughter-ready cattle down the line, Societe Generale said.

"The pace of cattle herd expansion remained slow so far," it said.

"However, after the recent rally, we believe prices are high enough to improve cow-calf operator margins."

Rising margins, as beef demand stays strong

Margins are being lifted by strong meat prices, and continued low feed cots.

Societe Generale said it expected retail beef prices to "remain supported by the concentrated structure of the meatpacking industry in the US and improving macroeconomic environment".

"The sharp rally in live cattle prices has significantly improved feed yard margins as feed costs remained largely unchanged," the bank said.

These good margins are seen driving feed lots to ramp up buying, with placements up 11% year-on-year, and Societe Generale said these placements may "remain strong in the coming months due to improved feed yard profitability".


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