Societe Generale slapped a buy rating on late-dated live cattle futures, suggesting that prices have now falling below the cost of production, which means that the cannot be maintained indefinitely.
But the bank warned that this recovery may take some time to manifest, given the fact that beef stockpiles are ample, even as heavy cattle continue to work their way toward slaughterhouses.
"We reiterate our bullish view on cattle and believe that most of the negative news for cattle is already priced in, and that cattle prices are near the bottom of the downward cycle," Societe Generale said.
The bank forecast prices for live cattle, cattle which have gained weight on feedlots and are ready for slaughter, to average 126 cents a pound in the first three months of 2018. In comparison, February live cattle futures are currently trading at around 105 cents a pound.
'Attractive buying opportunity'
"We believe that the long end of the forward curve presents an attractive buying opportunity for investors as prices are below the cost of production," the bank said.
"Prices are currently below the cost of production for cow-calf operators and are also hurting the profitability of feed yards."
And given high production costs and low cattle prices, herd expansion will slow the pace of herd expansion, meaning fewer animals down the line.
"This should continue to lend support to cattle prices despite high inventories," the bank said.
At the same time, "lower retail prices and strong economic growth in the US should facilitate a recovery in beef demand," Societe General said.
The bank noted estimates from the US Department of Agriculture, suggesting that per capita beef consumption in the US will increase 2.6% year-on-year, the sharpest increase since 2006…
Rally will take time
But Societe Generale said it does not expect prices to rally hard in the near term, due to high inventories, slowly declining retail beef prices, and competition from ample pork supplies.
The bank actually trimmed its outlook for both live and feeder prices over the April to June period of this year, by one cent apiece, to 111 and 128 cents a pound respectively.
This still leaves the outlook at couch above the curve, with June live cattle futures trading at around 108 cents a pound.
The feeder cattle outlook is basically in line with the current forward price curve.
"The current low level of live cattle prices has shrunk demand for feeder cattle, as feed lots are less interested in taking cattle off pasture," Socieite Generale said.