Societe Generale recommended a bet on the closing of the premium of feeder cattle over fattened ones, while foreseeing better times for lean hog futures, for which it said it was “bullish” on prices further ahead.
The bank recommended a short bet in August futures in feeder cattle – younger animals, yet to be fattened on feedlots – spread against a long position in live cattle, ie those ready for slaughter.
Feeder cattle prices for August “are high relative to live cattle prices”, SocGen said, with the price spread on Monday at nearly 39 cents per hundredweight.
This “should result in weaker margins for feedlots” which could in turn “lead to weak demand for feeder cattle in the second half of 2018”.
The bank said it was “slightly bullish” on live cattle futures in the six-month timescale thanks to the potential for weight gains to come in short of the 4.6% growth that the US Department of Agriculture has forecast for 2018.
“So far in 2018, cattle dressed weights are just 0.6% higher than last year,” SocGen analyst Rajesh Singla said, a factor flagged separately by livestock analysts at Steiner Consulting, who said that US “beef supply growth has been rather muted, which has supported the value of the beef cutout”.
The slow growth has been attributed to factors including cold weather, which limits weight gains.
Whole beef prices will “remain rangebound at $200-220 per hundredweight”, Mr Singla said, forecasting support from growth in both US and export markets.
On feeder cattle, SocGen said it was “neutral” on prices up to the one-year horizon.
Hog price prospects
On lean hogs, the bank said it was, “bullish” on prices for late this year and heading into 2019, forecasting Chicago prices at 68.0 cents a pound for the October-to-December period, and 72.0 cents a pound for the first three months of 2019, values ahead of the futures curve.
December futures were on Monday trading at 62.4 cents a pound, with the February 2019 lot at 66.65 cents a pound.
While seeing pork supply grow by 4.6% this year, boosted by rising weights and a rise of 2.3% in the pig crop, “a gradual recovery in demand might mitigate the impact of the increase in pork supply by year end”.
US domestic demand is the most important dynamic to follow, with exports accounting for “just 20%” of pork production, Mr Singla added.