Monday, April 12, 2010

Livestock led recovery

While you wouldn’t know by looking at local cattle prices, the global agricultural sector could be on the cusp of a livestock led recovery. Although, local cattle prices are now on the rise, the local cattle industry is suffering from the effects of a higher $A and tight supplies which is negating export demand. For the minute, this is constraining feedlot numbers, beef production and feed grain demand.

Already, though we have noted that some local producers are preparing to swing marginal paddocks back to sheepmeat production in 2010. Excellent returns for sheepmeat will see some restocking occurring this year and, most likely, more intensive feeding in years to come, as the grain/meat price ratio swings back in favour of meat production.

What is currently happening overseas though, could have far reaching longer-term impacts for the global agricultural sector. This week US cash cattle prices hit US$100/cwt, which was the first time the cash market hit the century mark since July 2008. While tight market-ready supplies are largely behind the strong surge in cash cattle prices, demand is also improving. With retailers continuing to buy beef even at higher prices, processors have incentive to actively compete for tight supplies. If demand can stay strong even at higher prices, it would give the cash cattle market a chance to make a run at the all-time high posted in the fall of 2003.

A lot of attention has been placed on the most recent quarterly stocks figures for corn that showed a decline in demand from the livestock feeding sector – still the major consumer of grain globally (demand from the ethanol sector through the quarter was maintained at all-time record highs). With the US livestock sector showing strong signs of recovery during the March-June quarter, it is likely that demand for feed grain from this sector is again on the rise.

The easiest way to increase meat production in the short-term is to increase grain feeding. In short, it looks like a recovery in demand for feed grain from the global livestock sector could be well under way. Changes in demand usually have a gradual impact on prices. With grain stocks at elevated levels, signs of a recovery in demand from this very important sector are currently taking a backward seat to incessant talk about huge levels of grain production.

We will need to see a few nicks in supply before demand becomes a major talking point again, but rest assured we will be talking about it as one of the catalysts of a recovery in grain prices – in 2011, if not sometime later in 2010.

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