SocGen still bullish on cattle prices

25.11.2016

Society Generale cut its forecast for cattle prices, but remains bullish on prospects, citing the squeezed margins for producers.

The bank saw weak consumer demand, and lower feed costs, weighing on prices.

"We do not expect cattle prices to move sharply higher from current levels in the near term due to still-high inventories and the slow pace of decline in retail beef prices," said SocGen.

SocGen also saw pork prices remaining competitive compared to beef, weighing on consumer demand.

Also citing lower feed costs, SocGen cut its live and feeder cattle price estimates by 15-20% for 2017.

Bad news priced in

But SocGen's forecast for cattle prices remains above the futures curve.

Rajesh Singla, agricultural commodity analyst at SocGen, saw cattle prices unlikely to fall further.

"We believe that most of the negative news for cattle is already priced in, and that cattle prices are near the bottom of a two-year downward cycle," he said.

"We see limited downside risk from current levels for prices, which are currently below the cost of production for cow-calf operators and are hurting the profitability of feed yards," Mr Singla said.

Feed yard margins squeezed

Fundamentals are supportive for prices, SocGen said, with non-existent margins discourage the breeding of calves, and the feeding of cattle for slaughter.

"Prices are currently below the cost of production for cow-calf operators and are also hurting the profitability of feed yards.

We believe higher production costs and lower cattle prices will continue to result in further decline in cattle placement in feedlots.

This should continue to lend support to live cattle prices despite high inventories.

Prices above futures curve

SocGen forecast live cattle prices to average 111.60 cents a pound over 2017. Live cattle futures for April 2017 are trading around 110 cents a pound, while October futures are trading at 98 cents.

Feeder cattle, which are cattle from pasture ready for deliver to feedlots, are seen averaging 129.80 cents a pound.

April feeder cattle futures are trading at 120 cents a pound, with October futures at around 118 cents a pound.

Hog dynamics encourage production

But SocGen is slightly bearish on hog prices, with margins still favouring production.

"Hog prices are trading near the cost of production on a total cost basis but are still profitable on an operating cost basis, whereas the cattle business is loss making," Mr Singla said.

SocGen sees hog prices in 2017 averaging 61.60 cents a pound.

April lean hog futures are trading at around 62 cents a pound, with October futures at 63 cents a pound.

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