A mountain of meat has ended the longest rally in U.S. cattle prices since at least the 1960s, when baby boomers and McDonald’s Corp. ushered in the American burger boom.
Not only have ranchers added to their herds, but consumers are being inundated with increased supplies of cheaper pork and poultry. Ground-beef prices are down from a record high 11 months ago, and buyers like Darden Restaurants Inc., owner of the LongHorn Steakhouse chain, expect to see costs for the meat decline for at least a couple years.
Cattle futures doubled during a six-year rally as a prolonged drought in Texas and high feed costs left the smallest U.S. herd in six decades. Since then, a grain glut reduced the cost of raising steers as well as hogs and chickens, and the government says meat production will grow this year. Rising supplies probably mean the cattle slump will continue, according to Goldman Sachs Group Inc.
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“As long as you don’t get a shock in the grain markets, you’re more likely to continue to produce at high levels,” said Tim Rudderow, chief investment officer at Mount Lucas Management in Newtown, Pennsylvania, which oversees $1.7 billion. “That will maintain pressure on cattle prices over time.”
After touching a record $1.7275 a pound in November 2014, futures plunged 16 percent last year, the biggest drop since 1981. That halted a rally that was the longest since cattle trading began on the Chicago Mercantile Exchange in 1964. Goldman, in a report last month, forecast a further decline to $1.20 in 12 months. Prices closed Wednesday at $1.33025.
Ranchers who had been reducing herds every year since 2007 have seen pasture conditions improve, and feed costs dropped after years of record U.S. corn harvests. On feedlots, where young cattle spend around four to six months eating mostly corn, the average weight of animals sold to slaughterhouses in November was the highest ever, U.S. Department of Agriculture data show. Beef production will rise 3.8 percent this year, the first gain since 2010, the USDA said Jan. 12.
“For many years, one thing that was sure was cattle prices would go higher,” said Altin Kalo, an analyst at Steiner Consulting Group in Manchester, New Hampshire. “Now we’re switching, and the cattle herd is increasing.”
But so are pork and chicken supplies. The USDA forecasts output of both meats this year will top records in 2015, and producers show no signs of letting up, said Rich Nelson, the chief strategist at McHenry, Illinois-based Allendale Inc. Combined output of red meat and poultry will jump 2.8 percent in 2016 to an all-time high, government data show.
At the same time, a strengthening dollar is hurting sales of U.S. beef overseas. Exports last year were down 12 percent through November while imports soared 20 percent, according to the latest USDA data. Domestic inventories of red meat at the end of November were the highest ever for that date.
“We experienced basically a supply-side shock” across all meat types, said Trevor Amen, an animal-protein economist at CoBank in Greenwood Village, Colorado.
Not everyone is convinced prices will drop. In November, the number of cattle sent to feedlots fell 11 percent from a year earlier, and wholesale beef has jumped 23 percent from a two-year low on Dec. 21, partly because unusually cold weather limited weight gain for some animals, USDA data show.
Rabobank International, in a Nov. 27 report, forecast cattle futures will average $1.52 in the fourth quarter of 2016.
For now, the government still expects beef supplies to expand. The USDA on Tuesday reiterated its forecast for a drop in cattle prices this year to an average of $1.37 a pound, compared with $1.4812 in 2015. Retail ground beef, which has more than doubled since 2009, averaged $4.113 a pound in November, compared with a record $4.238 in February, government data show.
Orlando, Florida-based Darden expects “to purchase beef in a deflationary environment for the next couple years,” Chief Executive Officer Eugene Lee said on a Dec. 18 earnings call.
“The cattle market is just catching up with the rest of the agricultural commodities,” said Don Roose, president of U.S. Commodities in West Des Moines, Iowa. “We’re in what we think is a multi-year bear market.”