Societe Generale slapped a buy rating on late-dated live
cattle futures, suggesting that prices have now falling below the cost of
production, which means that the cannot be maintained indefinitely.
But the bank warned that this recovery may take some time to
manifest, given the fact that beef stockpiles are ample, even as heavy cattle
continue to work their way toward slaughterhouses.
"We reiterate our bullish view on cattle and believe that
most of the negative news for cattle is already priced in, and that cattle
prices are near the bottom of the downward cycle," Societe Generale said.
The bank forecast prices for live cattle, cattle which have
gained weight on feedlots and are ready for slaughter, to average 126 cents a
pound in the first three months of 2018. In comparison, February live cattle
futures are currently trading at around 105 cents a pound.
'Attractive buying opportunity'
"We believe that the long end of the forward curve presents
an attractive buying opportunity for investors as prices are below the cost of
production," the bank said.
"Prices are currently below the cost of production for
cow-calf operators and are also hurting the profitability of feed yards."
And given high production costs and low cattle prices, herd
expansion will slow the pace of herd expansion, meaning fewer animals down the
"This should continue to lend support to cattle prices
despite high inventories," the bank said.
At the same time, "lower retail prices and strong economic
growth in the US should facilitate a recovery in beef demand," Societe General
The bank noted estimates from the US Department of
Agriculture, suggesting that per capita beef consumption in the US will
increase 2.6% year-on-year, the sharpest increase since 2006…
Rally will take time
But Societe Generale said it does not expect prices to rally
hard in the near term, due to high inventories, slowly declining retail beef
prices, and competition from ample pork supplies.
The bank actually trimmed its outlook for both live and
feeder prices over the April to June period of this year, by one cent apiece,
to 111 and 128 cents a pound respectively.
This still leaves the outlook at couch above the curve, with
June live cattle futures trading at around 108 cents a pound.
The feeder cattle outlook is basically in line with the current
forward price curve.
"The current low level of live cattle prices has shrunk
demand for feeder cattle, as feed lots are less interested in taking cattle off
pasture," Socieite Generale said.