Rancher Pays 1,700% Premium for Bull to Tap U.S. Prime Beef Boom

March 24, 2015 11:03 AM
Rancher Pays 1,700% Premium for Bull to Tap U.S. Prime Beef Boom

Perhaps more than ever, the money in the beef business is in the marbling.

Joe Mayer knows this well.

At his ranch in Guymon, Oklahoma, a small, wind-swept town along the High Plains north of Texas, Mayer dotes on the “super bull” he bought last year for $130,000. The jet-black bull -- Momentum is his name -- has one job: Sire cattle whose meat displays the flavor-enhancing fatty tissue, or marbling, that is a hallmark of prime beef cuts including high-end Porterhouse steaks and filet mignon. With normal bulls fetching about $7,000, Mayer essentially bet $123,000 that the boom in demand for such luxury meats is here to stay.

U.S. sales at fine-dining restaurants, where customers spend $50 or more for meals, surged last year at twice the rate of the broader industry, according to researcher Technomic Inc. With steakhouse chains including Ruth’s Hospitality Group Inc. raising menu prices, ranchers are responding. They’re boosting output of high-end cattle using DNA testing and artificial insemination while pampering prized bulls like Momentum in ways unfamiliar to most cows.

“A prime steer has never had a bad day, so our cattle, they’re babied, almost like your pet dog,” said Mayer, 65, who raises calves and also sells the semen from his high-end bulls in thousands of vials for as much as $25 each to other ranchers. “The incentive is you get more money. They’re looking for a very hard-to-achieve end game there, and if you can achieve, you get rewarded.”

Growth Market

In the past three years, Mayer has bought six “super bulls” that possess the genes for siring marbled-meat offspring. He spent from $40,000 to $130,000 on each, doubling his production of prime-graded cattle to 30 percent of his herd in 2014. By 2017, that figure will climb to 50 percent, he said.

While high-end beef in the U.S., the world’s largest producer, remains a niche market at 4.2 percent of most slaughtered cattle, it is the lone area of growth. The total domestic herd shrank to a six-decade low at the start of 2014 because of high feed costs and a prolonged drought in Texas. Weekly prime production jumped 32 percent over five years to 16.1 million pounds in 2014, while total beef slid 6.7 percent to 467.8 million pounds, according to data from the U.S. Department of Agriculture and Certified Angus Beef LLC, a rancher-owned nonprofit that promotes the meat as a brand.

Making Grade

Beef is graded according to USDA quality standards that includes marbling, texture and firmness to determine rating categories, with prime, choice and select being the highest grades. More than two thirds of U.S. production is described as choice.

Prime beef sold on average at $2.6498 a pound last month, the most of any February since the USDA began tracking the data in 2004 and about 23 cents more than wholesale choice.

Demand for high-end cuts is increasing as the U.S. economy expands at the fastest pace in a decade. Gross domestic product will grow 3 percent this year, the most since 2005, according to the median estimate in a Bloomberg survey of 83 economists. The economy and labor market are on the mend, and wages are expected to rise, Federal Reserve Bank of San Francisco President John Williams said Tuesday.

“Business spending is up, attendance at meetings is up, and it’s like every plane you get on is full,” said James Lynch, owner of 801 Chophouse, a Des Moines, Iowa-based restaurant chain. Sales at the company’s five steakhouses are up 12 percent in the first two months of 2015, with patrons shelling out $62 for a 24-ounce, bone-in Delmonico. “People are willing to spend money now. They step it up when things are good, and we’ve seen people step it up.”

Fine Dining

Sales at fine-dining restaurants, the top buyers of prime beef, grew 6 percent in 2014, twice the industry rate, researcher Technomic estimates. Americans are eating out even more to start 2015, with January sales surging 13 percent, the government said Feb. 12.

Upscale restaurants prefer the “more buttery flavor” of prime with fatty marbling that makes it more tender, said Michael Buhagiar, executive chef at Harris’ Restaurant in San Francisco. He pays as much as 25 percent more for prime beef over the next-best grade.

The cost of beef at more than 140 Ruth’s steakhouses probably will rise as much as 8 percent in 2015, Chief Financial Officer Arne Haak said on the Winter Park, Florida-based company’s earnings call Feb. 13.

More Supply

Rising supplies, or an unexpected economic slowdown, may curb the surge in prices. Corn-feed costs have plunged, encouraging ranchers to produce more prime cattle that can fetch $150 more per head, 10 times the long-term average profit for conventional steers, said Kevin Good, a senior analyst at Centennial, Colorado-based CattleFax.

Record profits last year spurred more investment in improved genetics, according to Mike Kasten, director of the University of Missouri-Columbia’s Quality Beef program.

DNA testing began around 2010, allowing ranchers to analyze tens of thousands of genetic markers to identify animals with the genes associated with prime beef. In the five months through February, DNA testing of registered Angus cattle increased 54 percent over the previous year, said Dan Moser, president of Angus Genetics Inc. in St. Joseph, Missouri.

So far, increased demand is soaking up the supply. The popularity of high-end meat has grown “dramatically” in recent years at Costco Wholesale Corp. The Issaquah, Washington-based retailer saw prime-beef sales in January jump 27 percent from a year earlier, and the number of pounds purchased grew 16 percent, Jeff Lyons, senior vice president at Costco’s Fresh Foods Department, said in an e-mail.

“It’s consumers that have thrown their dollars, and their preferences have created market signals to go back to improve the herd,” said Mark McCully, vice president of production at Wooster, Ohio-based Certified Angus Beef. “Consumers have had more access to prime today when they hadn’t before, and realized they like it and want more.”

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