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Buy live cattle, sell feeders, says SocGen

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Societe Generale recommended a split bet on the cattle complex – with a short bet on feeder animals spread against a long position in fattened stock – seeing a reversal of the recent price trend.

Futures in live cattle, animals ready for slaughter, have "underperformed", dropping late last month to a nine-month low of 104.05 cents a pound in Chicago, hit by a dent to demand from the high beef prices which reigned until mid-summer, the bank said.

"Record high beef prices have negatively impacted [US] beef demand since July," said SocGen analyst Rajesh Singla.

However, this dynamic is now poised to reverse, with the bank forecasting that "lower beef prices should facilitate a recovery in beef demand", seen growing on both domestic and export markets.

'Consumption to grow'

In the US itself, the US Department of Agriculture on Tuesday forecast per capita demand for beef growing by 3.6% this year, to 57.6 pounds, while growing by a further 1.6% in 2018.

"After remaining on a downtrend during 2007-15, per capita beef consumption in the US is expected to grow for a third consecutive year in 2018," Mr Singla said, noting support from factors such as a low unemployment and growing disposable incomes.

US beef exports, meanwhile, "should also recover as beef prices have become attractive and remain strong amid quality issues in Brazil, causing a reopening of the Chinese market for US beef".

Meanwhile, beef supplies will be constrained by average slaughter weights which the bank forecast remaining below 2016 levels this year, a factor "supportive for live cattle prices".

'Supportive scenarios'

Either beef supplies may fall short or, if they are to meet USDA expectations, will require higher slaughter rates, the bank said.

"Both the scenarios would be supportive" for live cattle futures.

"In the first scenario, lower beef supply and seasonally strong demand should support beef prices which in turn would be supportive for live cattle prices.

"In the second scenario, the increase in demand for live cattle for slaughtering by meat packers for beef production should be supportive of live cattle prices."

While cutting its forecasts for live cattle prices by up to 9 cents a pound, forecasts of values averaging, for instance, 113 cents a pound in a year's time were a little above levels that Chicago futures were trading at on Thursday.

"Our six-month and 12-month forecasts for live cattle are bullish," Mr Singla said.

'Feedlots running at a loss'

However, for feeder cattle - trading on Thursday at 144.90 cents a pound for March 2018 and 148.50 cents a pound for the August contract – the bank foresaw price falls ahead, to 130 cents a pound on both time horizons.

Futures have not stood this low since April.

The forecast reflected expectations of feedlots, still feeling the impact of the summer fallback in beef and live cattle prices, holding back on purchases of feeder cattle – animals which have yet to undergo the fattening process, which typically takes some six months.

Fuelled by the underperformance of live cattle futures, compared with feeder ones, "feedlot margins have fallen below breakeven levels," Mr Singla said.

With feeder cattle needing to fall to 135-140 cents a pound to enable breakeven, "feed yards should reduce demand for feeder cattle" at current values.

"The sharp decline in feed-yard margins should result in weak demand for feeder cattle in the coming months and hence the bearish price outlook for feeder cattle as compared to live cattle."

China factor

On lean hogs, SocGen forecast spot Chicago futures averaging 65.0 cents a pound in the first three months of 2018, marginally above the current futures curve, while appreciating only to 67.0 cents a pound in the April-to-June quarter.

That is below the level being pricing in on Thursday by investors, with June futures, for instance, trading at 76.70 cents a pound.

"The recovery in hog production in China in 2018 is the key reason we are bearish on 2018 lean hog contracts.

"The increase in slaughtering capacity in the US may provide some support to hog prices, while weak demand from China could keep pork prices subdued."

By Mike Verdin

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