Could live cattle prices put in a fourth positive year in 2012?
Values of Chicago-traded futures in live cattle – animals fattened for slaughter – look set for gains of about 13% this year, a rise of about one-half that seen in 2010, but outperformance nonetheless compared with the overall agricultural commodities complex.
The rise has been fuelled by strong demand from Japan, whose domestic supplies were disrupted by the earthquake, tsunami and their aftermath, and in particular South Korea, which suffered an outbreak of foot-and-mouth disease which prompted significant slaughter of domestic cattle.
The strength of live cattle prices, which set a record of 125.375 cents a pound in November, has defied high slaughter rates encouraged by drought in the southern US, which prompted farmers to take advantage of high cattle prices rather than pick up the expense of fodder, with pasture condition poor.
"While current large feedlot counts point to large fed cattle supplies in coming months, low feeder cattle inventory will continue to limit placements in coming months and point to strong live cattle prices into 2012.
Goldman Sachs forecasts for live cattle prices in 2012
Late Q1: 130.0 cents a pound
Late Q2: 125.0 cents a pound
Late Q3: 130.0 cents a pound
"While positive cattle margins have supported placements recently, we continue to expect sharply lower placements of cattle on feed in 2012 given tight feeder cattle availability. Feeder cattle supply has declined as a result of both strong placements on elevated deferred margins earlier this year as well as the persistent US drought.
"We expect that demand for meat will continue to improve, driven largely by strong emerging market income growth."
"Continued strength in beef export demand, coupled with high feed costs and contracting feeder cattle supply, all bode well for US live cattle prices.
"We expect exports will continue to provide a strong demand bane for US beef. With Japan and South Korea slow to rebuild their cattle herds following the Japanese earthquake and the South Korea outbreak of foot and mouth disease, US beef will likely remain in high demand.
"The year on year surplus in cattle on feed is expected to wane into the first half of 2012. We expect surpluses to ease as better weather and tighter feeder cattle inventories discourage additional early placements.
"Positive packer margins and light placement weights will likely encourage a pick-up in slaughter rates. The combination of strong beef demand, the result of early/light feedlot placement and high grain prices this summer, will likely keep the number of cattle slaughtered elevated into early 2010.
"US live cattle prices are expected to fall in the first quarter of 2012 from their November 2011 highs as a record number of cattle on feed outstrips demand in the near term.
"We anticipate the lower weights and increase in placements [in 2011] will result in a large amount of live cattle being brought to market into the early months of 0212 as cattle placed into feedlots in July, August and September of 2011 work their way through the system.
"With the anticipated relaxation of import restrictions by Japan and the recent ratification of the US-South Korea free trade agreement, we see both improved market access and export demand providing strong support for US beef prices in 2012.
"However, the upside may be tempered if economic conditions deteriorate much further and emerging-market economy growth slows."