Monday, August 6, 2012

Drought showing up in steepening of hogs and cattle forward curves

Some readers may have a bit of trouble with this post, but these are the realities of the marketplace. The current spike in corn prices is already making its way into the forward prices for meat products. Cattle and hogs markets are pricing in the impact of higher feed costs cutting into margins. Cattle ranchers are also affected by the drought destroying pasture. Ranchers will be cutting herd numbers, sometimes simply because there is no fresh grass, while hay supplies are running low. Keeping barns sufficiently cool has also been a problem with misters and fans running full blast. As the stored feed begins to run out, cattle and hogs liquidation begins. Cattle sale barns are booked weeks in advance these days.
Reuters: - Cattle ranchers and hog farmers have been culling their herds because of high feed costs, scorched pasture and increased hay prices brought on by the drought.

This could result in a near-term boost to meat supplies and possible lower prices, but consumers might have to fork out more for meat next year when cattle and hog supplies tighten.
With the expectations of reduced supply in 2013, the futures curves for lean hogs and live cattle have steepened materially.

Source: JPMorgan
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