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 said.

'Enormous losses'

"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.

"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.

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 year.

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 said.

Recovery ahead?

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 beef production".

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.