Burger Costs Rising With Beef Supply at 21-Year Low

August 1, 2013 05:35 AM
Burger Costs Rising With Beef Supply at 21-Year Low

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

Wholesale beef prices dropped 12 percent since reaching a record $2.1137 a pound on May 23, as the acceleration in slaughtering boosted supply, government data show. Prices probably will exceed that peak next year, said Ron Plain, a livestock economist at the University of Missouri in Columbia.

Global meat prices rose 2.1 percent in June, the most in nine months, while the overall cost of food dropped 0.9 percent to the lowest since February, United Nations data show. Retail ground beef averaged $3.382 a pound in June, the second-most ever behind the record of $3.407 in January, Bureau of Labor Statistics data show. Prices will top the record next year, said Steve Meyer, president of Paragon Economics in Adel, Iowa. The government estimates consumers will pay as much as 3.5 percent more for beef in 2014.

Beef costs for Ruth’s Hospitality Group Inc., the Heathrow, Florida-based steakhouse owner, climbed 17 percent over two years, Chief Financial Officer Arne Haak said during a presentation on June 25. The restaurant raised its prices in February. Next year and 2015 will still be tough because of the lack of supply, Chief Executive Officer Michael O’Donnell said in a presentation June 18.

Slowing Demand

Higher prices are curbing demand, with U.S. beef shipments tracked by the government down 2 percent this year through May. The dollar’s rally to a three-year high in July is also eroding the appeal of U.S. exports and China and Russia are restricting meat with ractopamine, a feed additive that some U.S. producers use to increase lean muscle.

Cheaper feed and the easing drought conditions in most places may encourage ranchers to expand. Corn futures on the Chicago Board of Trade are now 44 percent lower than the record reached in August. The USDA rated 44 percent of pasture and rangeland in good or excellent condition in the week ended July 28, compared with 17 percent a year earlier.

"There’s an awful lot of people wanting to expand," said Steve Foglesong, 56, who raises 9,000 head of cattle and farms 1,800 acres of corn and soybeans about 65 miles southwest of Peoria, Illinois. "The market signals are kind of there."

Bullish Signal

An expansion would initially be bullish for prices because cows would be retained for breeding rather than slaughtered, said Chris Hurt, a professor of agricultural economics at Purdue University in West Lafayette, Indiana.

It takes about 30 months to boost beef production, according to CattleFax, an industry researcher in Centennial, Colorado. Calves have a nine-month gestation and take about 20 months to reach slaughter weight. Cattle in the U.S. are raised from birth on pastures for about a year, when they weigh 500 pounds to 800 pounds, and then are sold to feedlots. The animals then consume mostly corn until they are 1,200 pounds to 1,350 pounds and are sold to slaughtering plants.

Returns have varied across the supply chain. A feedlot that put a 750-pound steer on a corn-based diet for about five months and then sold it at 1,300 pounds for slaughter lost $148 a head on average in 2012 and as much as $306 in July, based on cash prices, said Lee Schulz, a livestock economist at Iowa State University in Ames.

Tight Supply

While calf producers made money, many culled herds because the drought parched pastures, Schulz said. About 67 percent of Texas, the largest cattle-producing state, remained in "severe drought" on July 23, up from 33 percent a year earlier, according to the U.S. Drought Monitor.

Corn surged 68 percent in less than two months last year, reaching an all-time high of $8.49 a bushel in August. Ranchers responded by sending more animals for slaughter, including cows normally held for breeding.

"You’ve got some years of pretty tight beef supplies," said John Nalivka, a former U.S. Department of Agriculture economist and the president of commodity researcher Sterling Marketing Inc. in Vale, Oregon. "If herd building starts, then you will really tighten the supply even more."

The number of domestic cattle reached 89.3 million on Jan. 1, the lowest since 1952, according to the USDA. The herd usually expands by midyear, after calves are born in the spring. It reached 96.24 million head on July, 1.6 percent less than a year earlier, according to the average of four analyst estimates.

Speculator Holdings

Hedge funds and other large speculators got increasingly bullish on cattle in the past four months, raising their bets on higher prices almost 20-fold since March 8, U.S. Commodity Futures Trading Commission data show.

At Bill Donald’s ranch near Melville, Montana, range conditions are "much improved." The third-generation owner of Cayuse Livestock Co. said he expects to return to normal capacity after reducing his grazing his herd by 15 percent because of the dry pastures.

"As we expand the herd, we will not be sending as many heifers into the feedlot chain," said Donald, who has about 1,500 cows and buys another 2,000 to 3,000 cattle a year. "It will tighten supplies, and that will keep pressure on prices to go upward."

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