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Livestock futures to underperform crops - Goldman

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Goldman Sachs lifted its forecast for cattle futures, but raised doubts over further rises in livestock prices, foreseeing them underperforming crop markets over the next year.

The bank lifted by 17 cents a pound to 150 cents a pound its forecast for spot Chicago live cattle futures on a three-month horizon, raising expectations for price further ahead too.

"The seasonal increase in fed cattle [supplies] has, so far, been much weaker than normal despite larger feedlot placements earlier in the year," Goldman said.

While the larger spring entry of cattle for fattening on feedlots implies a recovery ahead in supplies of animals ready for slaughter, "this rise in fed cattle will be short lived".

US Department of Agriculture data on Friday showed placements on feedlots last month falling 6.2% to 1.46m head, with lighter animals, taking longer to fatten, making up a high proportion of the intake.

And with a separate USDA report showing the US calf crop "at the lowest since 1948, "this points to a longer herd rebuilding process than previously expected and supplies remaining tight into 2016", Goldman said.

Crops vs livestock

Nonetheless, its forecasts for cattle prices remain below the futures curve - with Chicago's October contract trading at 159.225 cents a pound on Tuesday, and further ahead lots remaining above Goldman expectations too.

And with the bank maintaining forecasts of a steeper decline in lean hog futures than markets are pricing in, it forecast a 5.0% drop in prices the livestock complex over the next year.

That exceeds the 2.0% decline expected for crop prices – marking a distinct reversal from the sectors' performances so far this year.

Thus far in 2014 the crop segment of the S&P GSCI commodities index has fallen by 6.0%, while the livestock element has soared by 30%.

'Higher inventories and lower prices'

The relative stability forecast for crop futures reflected Goldman forecasts that futures have already done most of the work for pricing in expectations of large world grain production, although its forecasts for soybeans fall to $10.50 a bushel on 3-12-month horizons are below the market.

The prospect of a record US soybean crop, "combined with record South American production and an expected slowdown in Chinese import growth… means that we continue to see higher inventories and lower prices in the new crop year".

For corn, the bank, citing the prospect of a record US crop, acknowledged "downside risk" to its forecast for futures to stick at $4.00 a bushel on 3-12-month horizons.

'Upside price risks and volatility'

However, among soft commodities, New York cotton prices are expected to recover to 75 cents a pound, well above the futures curve, despite pressure from improved US harvest prospects and expectations of a drop in Chinese imports.

For raw sugar, Goldman forecast prices sticking at 17.5 cents a pound, above October futures but below prices above 18 cents a pound at which 2015 contracts are trading at.

The world sugar market "will remain in surplus for a fourth consecutive year" despite a drop in Brazilian cane yields," the bank said.

"That said, the longer-term effects of the drought in Brazil, both on plants and balance sheets, remain to be seen, and an El Niño weather pattern developing later this year cannot be conclusively ruled out yet.

"As such, upside price risks and volatility could remain until later in the harvest season."


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