Friday, July 12, 2013

Live cattle futures best bet in livestock - SocGen


The switch to cheaper meats will dampen beef prices - but live cattle futures may offer a better bet for livestock investors than lean hogs, suggests Societe General, citing the shrinking US bovine herd.

"In light of higher beef prices consumers have switched to cheaper poultry and pork items," said Christopher Narayanan, analyst with Societe General.

Nonetheless, SocGen said that the drop in US herd levels in recent years to their lowest in almost five decades, owing to persistent drought conditions, will provide longer-term support to beef prices.

"Tight supplies will continue to be a large factor in supporting live cattle prices, especially in the long-term, until herds have time to expand."

"Although we are seeing demand shifts away from beef and are expecting strong grain production, tight supplies of feeder cattle will ultimately lead to an increase in the price of live cattle".

Live vs feeder cattle

SocGen, beginning coverage of the livestock sector, forecast that futures in live cattle – animals fattened for slaughter - would average nearly 125 cents a pound in the July-to-September quarter and close to 130 cents a pound in the last three months of 2013 .

There are levels some 3-5% above the levels that futures currently suggest.

However, prices of feeder cattle – animals yet to be fattened - will be "more heavily affected" by weaker beef demand, and with weaker grain prices lowering the floor of production costs, will see less buoyant pricing.

Futures will track some 5% below levels the market is suggesting for the second half of 2013, with a deeper decline expected in the first half of next year.

Cattle vs hogs

On lean hogs, SocGen noted pork prices had been undervalued relative beef prices earlier in the year, causing a shift amongst retailers towards cheaper-pork products.

The price ratio of choice beef to lean pork, as measured by "cutout" wholesale values, has fallen to some 1.85 from early-2013 levels of 2.54m, Mr Narayanan said.

This decline signals that "pork is no longer cheap relative to beef and that the increasing pork demand should start slowing".

The impact will be to "see lower lean hog prices for the remainder of 2013 and into 2014", with futures particularly weak in the October-to-December quarter when they will fall below 76 cents a pound.


SocGen did, however, note the threat posed by porcine epidemic diarrhea virus (PEDv) as potentially bullish for pork prices.

"If the spread of PEDv is not contained, we would expect to see lean hog prices rise".

The virus, which causes severe diarrhoea, vomiting and severe dehydration in pigs, and can be fatal, was officially identified in the US in May and has spread to 16 states, according to the American Association of Swine Veterinarians.

* The US Department of Agriculture on Thursday, in its benchmark Wasde report, trimmed to $124-134 per hundredweight, from $126-136 per hundredweight, its forecast for steer prices in 2013, with a $2 cut to estimates for 2014 too, noting that market values"have weakened recently".

The USDA lifted to $60-64 per hundredweight, from $58-62 per hundredweight, its forecast for barrow and gilt prices in 2013 citing "demand strength", but said that price gains "will be limited by higher production".  

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