The decline in hog and live cattle futures might have further to run thanks to the dent to the industry from soaring grain prices, Goldman Sachs said cutting its forecast for prices – until 2013.
The bank cut its forecast for Chicago lean hog futures from 95 cents a pound to, on a three-month horizon, 79 cents a pound and, on a six-month timescale, to 76 cents a pound, on a spot contract basis.
If the forecast is realised, that would represent the lowest price for a spot contract in two years.
The downgrade reflected the high feed prices, lifted by the grains rally, which "have pushed margins sharply lower, with current losses likely generating some herd liquidation and sow culling in coming months", Goldman said.
"This increase in pork supply will likely weight on prices," offsetting the boost to values from exports set to rise 4.1% this year, on US Department of Agriculture estimates, and from lower carcass weights, as farmers hold back on feed.
University of Illinois calculations last week showed costs of pork production reaching a record high of $72 per hundredweight for the July-to-September quarter – meaning losses of about $20 a hundredweight, which look set to continue into 2013.
"Losses in animal industries will be enormous over the next year," University of Illinois agribusiness economist Chris Hurt said.
Larger beef supplies
Indeed, Goldman also cut its forecast for short-term live cattle prices, citing the pressure from higher supplies as ranchers liquidate herds in the face of high feed prices, with pasture conditions poor too, in turn a factor in squeezing hay supplies.
Beef supplies for the rest of 2012 will also be boosted by the swelling numbers of younger cattle being placed on feedlots for fattening, with imports of animals from Mexico and Canada "likely remaining strong as well".
Furthermore, on the demand side, the US faces a drop in beef exports, thanks largely to a stronger dollar, with the US Department of Agriculture forecasting a 7.2% drop to 2.588bn pounds in US shipments this year.
Chicago's spot futures in live cattle, animals ready for slaughter, will stand at 115 cents a pound on a three-month horizon, the bank said.
However, taking a one-year outlook, prices of both lean hog and live cattle futures stand to recover, as the herd liquidation under way for now leaves a hangover of smaller supplies ahead.
For hogs, "drought-induced liquidation… will curtail farrowing points to flat hog supplies in 2013 and should support prices on a 12-mo horizon", Goldman said.
For live cattle, larger placements on feedlots for now "will curtail the already limited availability of calves this fall, with fed weights likely to decline on high feed costs and further contributing to a decline in beef production".
Grain price rally ...