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Burger Costs Rising With Beef Supply at 21-Year Low

August 1, 2013
beef cow prices
  
 
 

Surging feed costs have spurred ranchers to cut herds.

Elizabeth Campbell

U.S. beef production is plunging to a 21-year low after surging feed costs spurred ranchers to cut herds, signaling record prices for consumers and higher costs for buyers from McDonald’s Corp. to Ruth’s Chris Steak House.

Production in the U.S. will decline 4.9 percent to 10.93 million metric tons in 2014, retreating for a fourth year, the government says. The herd on July 1 was the smallest for that date since at least 1973, according to the average of four analyst estimates compiled by Bloomberg. The most-active cattle futures will rise 6 percent to $1.33 a pound next year, a level last seen in February, the median of nine forecasts shows.

Ranchers still haven’t recovered from last year’s drought that sent grain costs to a record and spurred them to slaughter more cattle. While feed costs are now slumping as U.S. farms prepare to reap the biggest corn crop ever, it takes more than two years to raise enough animals to expand supply. Retail ground-beef prices in June were up 13 percent from a year earlier and near a record set in January.

"The drought has really affected the cow herd," said Tucker Hughes, a 65-year-old rancher in Stanford, Montana, who predicted the number of animals he retains for breeding may drop as much as 20 percent over the next two years. "Some people had to downsize their herds. When you get these droughts, you have to reduce your numbers."

Cattle Rebound

Traders are anticipating that this year’s 5.1 percent drop in futures to $1.25525 a pound on the Chicago Mercantile Exchange will reverse. Their prediction would take prices close to the record of $1.35175 reached Jan. 11. Futures averaged about $1.249 since the start of January, heading for the highest-ever annual level.

The Standard & Poor’s GSCI Agriculture Index of eight commodities fell 17 percent this year, and the MSCI All-Country World Index of equities rose 10 percent. Treasuries lost 2.6 percent, the Bloomberg U.S. Treasury Bond Index shows.

McDonald’s, the world’s largest restaurant chain, probably will pay 2.5 percent to 3.5 percent more for beef this year, according to Jack Russo, a St. Louis-based analyst at Edward Jones & Co. That’s more than the forecast 1.5 percent to 2.5 percent increase in total commodity costs that Chief Financial Officer Peter Bensen predicted on a July 22 conference call.

While the Oak Brook, Illinois-based company will consider charging more for food, competition and price-sensitive consumers mean "we have less pricing power in 2013 versus a year ago," Bensen said.

Higher Prices

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