Drought-Fueled Cattle Sales May Ease Rising Beef Costs for Tyson

A prolonged drought from Kansas to Texas probably forced U.S. ranchers to sell more cattle to feedlots last month, signaling increased supplies for meat processors including Tyson Foods Inc. (TSN) and lower beef prices.

Deteriorating pasture conditions in the southern Great Plains and record cattle prices prompted the sale of 1.935 million head to feedlot operators, up 4.2 percent from March 2010, according to a Bloomberg survey of 14 analysts. The U.S. Department of Agriculture will disclose the feedlot inventory today at 3 p.m. in Washington.

As the animals near their slaughter weights in the next three or four months, retail-beef prices may slip from all-time highs and cattle futures may drop 14 percent from a record $1.21625 a pound reached April 4, said Troy Vetterkind, the owner of Vetterkind Cattle Brokerage. More cattle will reduce costs for processors, including Tyson and JBS SA (JBSS3), and wholesale meat buyers such as Morton’s Restaurant Group Inc. (MRT)

“There’s just going to be ample numbers of cattle come to slaughter later on this summer,” Vetterkind said by telephone from Chicago. “You’ll probably see beef prices start to trend lower into July and August.”

In the U.S., the world’s largest beef producer and second- largest exporter, after Brazil, feedlots buy year-old cattle that weigh 500 pounds (227 kilograms) to 800 pounds, called feeders. It takes about four or five months on a diet of mostly corn before the animals weigh about 1,200 pounds, when they are sold to meatpackers.

Cattle for Processors

More slaughter-ready supplies of cattle “probably would be good for the Tysons of the world,” said Timothy S. Ramey, a Lake Oswego, Oregon-based analyst at D.A. Davidson & Co.

Springdale, Arkansas-based Tyson, which also processes poultry and pork, is the biggest U.S. meat company. Sao Paulo- based JBS is the largest beef processor, after acquiring U.S. producers including Smithfield Beef Group in 2008.

“Higher placements in the near-to-medium term mean more animals heading through the system,” said Ramey, who has a “buy” rating on Tyson shares. “Right now, all protein is tight for the nine- to 18-month time horizon. They need raw material. They would love to have higher placements from the perspective of earnings three quarters out to six quarters.”

Operating profit in beef fell 2.5 percent to $116 million in the first fiscal quarter ended Jan. 1, compared with a year earlier, Tyson said on Feb. 4. Earnings for the unit were the lowest since the first quarter of 2009, company data show.

Summer Supply Surge

Slaughter rates in in the next three to four months may be 6 percent to 8 percent higher than last year because ranchers have been placing more animals into feedlots, said Rich Nelson, the director of research at Allendale Inc. in McHenry, Illinois. There’s “no doubt” that prices will fall as meat production increases, he said.

“We expected supplies to peak in summer and then drop sharply going into the third quarter,” Nelson said. “We may have the supply flow push into the third quarter.”

Some ranchers can’t afford to feed their livestock when dry weather limits the amount of grass on pastures. Parts of Texas, the largest cattle-producing state, had less than 10 percent of normal rainfall in March, according to the National Weather Service. The state had the “driest March in reported state history,” said Holly Huffman, a spokeswoman for the Texas Forest Service.

“The drought in the southern Plains is pretty bad right now, and pasture conditions in Texas and Oklahoma are really not good at all,” said Doug Houghton, an analyst at Richard A. Brock & Associates in Milwaukee. “It’s forcing cattle into feedlots that wouldn’t normally be going there.”

Mexican Exports

A jump in imported feeder cattle from Mexico also is boosting the number of placements into U.S. feedlots, analysts said. Parts of Mexico has been hurt by “severe drought,” according to the North American Drought Monitor. The U.S. has imported 437,819 Mexican feeder cattle since Dec. 31, up 35 percent from 324,776 head a year earlier, USDA data show.

“Drought is pushing them out of Mexico, and our high prices are pulling them into the U.S.,” said Jim Robb, the director of the Livestock Marketing Information Center, a Denver-based researcher funded by the industry and government.

Cattle futures have jumped 23 percent on the Chicago Mercantile Exchange during the past year, as demand increased for U.S. beef exports, domestic supplies tightened and the cost of raising animals rose with a doubling of corn prices. Retail beef advanced to a record $4.475 a pound last month, up 13 percent from a year earlier, government data show. Costlier meat has spurred grocery stores and restaurants to pass along the increases to consumers.

More Expensive Steaks

Morton’s Restaurant Group, the Chicago-based steakhouse chain, has been able “to pass along the dollar cost of our beef increases,” Chief Financial Officer Ronald M. DiNella said in a presentation on March 30. If “the cost of the steak goes up, we need to pass it along,” he said.

U.S. shoppers may pay as much as 5.5 percent more for beef this year, compared with a 2.9 percent gain in 2010 and a 1 percent decline in 2009, the USDA said March 25.

Climbing beef demand and the surge in prices helped increase the total number of cattle on U.S. feedlots in March, according to the Bloomberg survey.

The total herd on April 1 probably was 5.3 percent larger than a year earlier at 11.307 million head, the survey showed. Producers probably sold 1.958 million animals to beef-processing plants in March, up 2.9 percent from a year earlier, the analysts said.

Rising Beef Demand

Cattle prices are climbing as global economic growth boosts incomes and demand for meat protein in emerging economies. Japan also is importing more after a nuclear disaster led to concern that domestic food supplies were unsafe.

In the first two months of 2011, U.S. exporters shipped about 388 million pounds (176 million kilograms), up 25 percent from the same period last year, government data show.

Cattle futures for June delivery fell 0.6 percent yesterday to $1.165 in Chicago. Feeder-cattle futures, which touched a record $1.42 a pound on April 1, rose 0.2 percent yesterday to settle at $1.38475.

While the increase in supplies may send prices down in the near term, fewer animals will be available for slaughter later in the year, Allendale’s Nelson said.

“We’re going to see an extreme shortfall in supplies in the fourth quarter, and it will get worse in the first half of 2012,” Nelson said.

To contact the reporter on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net.

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