Societe Generale recommended a split bet on the cattle
complex – with a short bet on feeder animals spread against a long
position in fattened stock – seeing a reversal of the recent price trend.
Futures in live cattle, animals ready for slaughter,
have "underperformed", dropping late last month to a nine-month low of 104.05
cents a pound in Chicago, hit by a dent to demand from the high beef
prices which reigned until mid-summer, the bank said.
"Record high beef prices have negatively impacted [US]
beef demand since July," said SocGen analyst Rajesh Singla.
However, this dynamic is now poised to reverse, with
the bank forecasting that "lower beef prices should facilitate a recovery
in beef demand", seen growing on both domestic and export markets.
In the US itself, the US Department of Agriculture on
Tuesday forecast per capita demand for beef growing by 3.6% this year, to
57.6 pounds, while growing by a further 1.6% in 2018.
"After remaining on a downtrend during 2007-15, per
capita beef consumption in the US is expected to grow for a third
consecutive year in 2018," Mr Singla said, noting support from factors
such as a low unemployment and growing disposable incomes.
US beef exports, meanwhile, "should also recover as
beef prices have become attractive and remain strong amid quality issues
in Brazil, causing a reopening of the Chinese market for US beef".
Meanwhile, beef supplies will be constrained by average
slaughter weights which the bank forecast remaining below 2016 levels this
year, a factor "supportive for live cattle prices".
Either beef supplies may fall short or, if they are to
meet USDA expectations, will require higher slaughter rates, the bank
"Both the scenarios would be supportive" for live cattle
"In the first scenario, lower beef supply and
seasonally strong demand should support beef prices which in turn would
be supportive for live cattle prices.
"In the second scenario, the increase in demand for
live cattle for slaughtering by meat packers for beef production should
be supportive of live cattle prices."
While cutting its forecasts for live cattle prices by
up to 9 cents a pound, forecasts of values averaging, for instance, 113
cents a pound in a year's time were a little above levels that Chicago futures
were trading at on Thursday.
"Our six-month and 12-month forecasts for live cattle
are bullish," Mr Singla said.
running at a loss'
However, for feeder cattle - trading on Thursday at
144.90 cents a pound for March 2018 and 148.50 cents a pound for the
August contract – the bank foresaw price falls ahead, to 130 cents a
pound on both time horizons.
Futures have not stood this low since April.
The forecast reflected expectations of feedlots, still
feeling the impact of the summer fallback in beef and live cattle prices,
holding back on purchases of feeder cattle – animals which have yet to
undergo the fattening process, which typically takes some six months.
Fuelled by the underperformance of live cattle
futures, compared with feeder ones, "feedlot margins have fallen below
breakeven levels," Mr Singla said.
With feeder cattle needing to fall to 135-140 cents a
pound to enable breakeven, "feed yards should reduce demand for feeder
cattle" at current values.
"The sharp decline in feed-yard margins should result
in weak demand for feeder cattle in the coming months and hence the
bearish price outlook for feeder cattle as compared to live cattle."
On lean hogs, SocGen forecast spot Chicago futures
averaging 65.0 cents a pound in the first three months of 2018, marginally
above the current futures curve, while appreciating only to 67.0 cents a
pound in the April-to-June quarter.
That is below the level being pricing in on Thursday
by investors, with June futures, for instance, trading at 76.70 cents a
"The recovery in hog production in China in 2018 is
the key reason we are bearish on 2018 lean hog contracts.
"The increase in slaughtering capacity in the US may
provide some support to hog prices, while weak demand from China could
keep pork prices subdued."