The decline in hog and live cattle futures might have
further to run thanks to the dent to the industry from soaring grain prices, Goldman
Sachs said cutting its forecast for prices – until 2013.
The bank cut its forecast for Chicago lean hog futures from
95 cents a pound to, on a three-month horizon, 79 cents a pound and, on a
six-month timescale, to 76 cents a pound, on a spot contract basis.
If the forecast is realised, that would represent the lowest
price for a spot contract in two years.
The downgrade reflected the high feed prices, lifted by the
grains rally, which "have pushed margins sharply lower, with current losses likely
generating some herd liquidation and sow culling in coming months", Goldman
"This increase in pork supply will likely weight on prices,"
offsetting the boost to values from exports set to rise 4.1% this year, on US
Department of Agriculture estimates, and from lower carcass weights, as farmers
hold back on feed.
University of Illinois calculations last week showed costs
of pork production reaching a record high of $72 per hundredweight for the
July-to-September quarter – meaning losses of about $20 a hundredweight, which look
set to continue into 2013.
|Goldman Sachs forecasts for live cattle futures and (change on last)|
Three-month horizon: $1.15 per pound, (-$0.15 per pound)
Six-month horizon: $1.20 per pound, (-$0.05 per pound)
12-month horizon: $1.30 per pound, (unchanged)
"Losses in animal industries will be enormous over the next year,"
University of Illinois agribusiness economist Chris Hurt said.
Larger beef supplies
Indeed, Goldman also cut its forecast for short-term live
cattle prices, citing the pressure from higher supplies as ranchers liquidate
herds in the face of high feed prices, with pasture conditions poor too, in
turn a factor in squeezing hay supplies.
Beef supplies for the rest of 2012 will also be boosted by the
swelling numbers of younger cattle being placed on feedlots for fattening, with
imports of animals from Mexico and Canada "likely remaining strong as well".
|Goldman Sachs forecasts for lean hog futures and (change on last)|
Three-month horizon: $0.79 per pound, (-$0.16 per pound)
Six-month horizon: $0.76 per pound, (-$0.19 per pound)
12-month horizon: $0.95 per pound, (unchanged)
Furthermore, on the demand side, the US faces a drop in beef
exports, thanks largely to a stronger dollar, with the US Department of
Agriculture forecasting a 7.2% drop to 2.588bn pounds in US shipments this
Chicago's spot futures in live cattle, animals ready for
slaughter, will stand at 115 cents a pound on a three-month horizon, the bank
However, taking a one-year outlook, prices of both lean hog
and live cattle futures stand to recover, as the herd liquidation under way for
now leaves a hangover of smaller supplies ahead.
For hogs, "drought-induced liquidation… will curtail
farrowing points to flat hog supplies in 2013 and should support prices on a
12-mo horizon", Goldman said.
For live cattle, larger placements on feedlots for now "will
curtail the already limited availability of calves this fall, with fed weights
likely to decline on high feed costs and further contributing to a decline in
Grain price rally
The revised price outlooks follow upgrades last week by the bank to its hopes for corn, soybean and wheat futures, thanks to the impact of drought in curbing US production of row crops.
The rally in the grains continued on Monday, amid expectations for further hot and dry weather in the Midwest.
Corn for December rose 4% to a contract high of $7.72 a bushel, with soybeans for November setting their own contract high, of $15.94 ¾ a bushel.
Wheat for September, in its first day as the spot contract, soared more than 3% to $8.76 ¾ a bushel, the highest for a near-term lot since February last year.