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Livestock A Better Bet Than Crops Ahead

published: September 21st 2010
source: Agrimoney.com

Livestock look a better bet than crops over the next year, despite a "constructive" outlook for corn, Goldman Sachs has said, forecasting that live cattle prices will average more than $1 a pound for at least the next year.

The investment bank, while saying corn prices may be in for "another high leg", as reported in detail elsewhere on Agrimoney.com, said that the outlook for other crops was weak, with sugar overpriced by some 20%, in terms of year-ahead futures, and cotton by about 15%.

Despite its "constructive views on corn", the group forecast that crop prices were set for a negative return of about 10% over the next 12 months, more than wiping out gains so far in 2010.

Meanwhile, prices of livestock, which had underperformed during the summer, were set to regain the advantage, returning an average of 2.0% over the next year, the bank said, upgrading its forecast from an estimate of a flat performance.

Supply squeeze

The revision reflected improved prospects for live cattle - those ready for slaughter – whose price would be supported by a reluctance among feedlots to stock up while soaring feed prices inflate their feed bills.

Meanwhile demand for beef will be boosted both by higher domestic consumption and "significantly higher" exports, largely to Asian buyers.

"We expect this fundamental outlook to support live cattle prices," Goldman said, lifting its forecasts on three, six and 12-month horizons.

Firm demand and stagnant production would support hog prices too, even though the autumn, and the end of the barbecue season, "suggests that lean hog prices have likely peaked for 2010.

Support for prices

The report comes ahead of the latest official report on US feedlot dynamics, which traders expect to show a 0.6% decrease in placements last month, compared with August 2009, because of the higher feed prices, but a 6.2% jump in animals marketed, as operators cash in on higher beef prices.

Data expressed as % of year-ago figure
Indeed, the US Department of Agriculture, in a report earlier this week, noted that cow slaughter among livestock farmers had reached "an atypically high rate, given the cow herd base, and heifers continue to make up a larger share of cattle slaughter than they did last year.

"Both of these factors imply the potential for further declines in the national beef cow herd."

Meanwhile, beef production could be limited by the reduction in feedlot placings.

"Shorter beef supplies and higher prices for competing pork and poultry should provide some support for prices throughout the beef/cattle complex through at least the end of 2010," the department added.

In Chicago, live cattle for October stood 0.6% higher at 99.25 cents a pound at 14:00 GMT, with lean hogs for the same month up 0.5% at 78.55 cents a pound.

Feeder cattle – which represent the pool for feedlot placements – were 0.025 cents lower at 112.20 cents a pound.



Expectations for USDA cattle on feed report, (range of forecasts)

On feed, September 1: 101.1, (100.5-102.5)
Placed in August: 99.4, (96.1-106.2)
Marketed in August: 106.2, (105.0-107.4)
Goldman livestock price forecasts, and (previous, where changed
12 months time - live cattle, 105.0 cents per pound, (95.0 cents per pound); lean hogs 85.0 cents per pound
six months time - live cattle, 105.0 cents per pound, (95.0 cents per pound); lean hogs 8o.0 cents per pound
three months time - live cattle, 105.0 cents per pound, (93.0 cents per pound); lean hogs 78.0 cents per pound
"Higher expected feed costs will likely weigh on margins and reduce placement of cattle on feed," the bank said.