Costliest Texas Drought May Mean Lower Tyson Costs as Beef Supplies Gain

The costliest drought in Texas history probably forced ranchers to sell the most cattle to feedlots since December, signaling a surge in U.S. meat supply that may cut costs for processors including Tyson Foods Inc. (TSN)

Feedlot operators in the U.S. bought 2.051 million head of cattle last month, up 17 percent from a year earlier, based on the average of 13 estimates in a Bloomberg survey of analysts. The U.S. Department of Agriculture is scheduled to report inventories at 3 p.m. tomorrow in Washington. Texas is the biggest cattle-producing state.

The Texas drought, the worst in more than a century, has spurred a record $5.2 billion in farm losses, according to a unit of Texas A&M University. Costs to livestock producers may total $2.06 billion partly as ranchers are forced to sell cattle because parched pastures have boosted feed costs. Rising supply may mean cheaper beef for retailers and restaurants such as Chipotle Mexican Grill Inc. (CMG), which increased menu prices to combat food inflation.

“Everybody is looking for a big placement because there isn’t any range left anywhere in the southern U.S.,” Bob Price, a livestock analyst at North American Risk Management, said by telephone.

Rising feedlot placements “casts doubts” that cattle prices can remain high, Price said in a report. He forecast a 24 percent increase in placements, the second-highest among the analysts surveyed by Bloomberg.

Cattle Futures

Cattle futures, which last week traded within 0.5 percent of a record $1.21625 a pound, may drop to $1.10 by December, said Troy Vetterkind, the owner of Vetterkind Cattle Brokerage. Easing prices may bring relief to beef consumers after the wholesale cost of the meat climbed 13 percent this year, touching $1.9196 a pound on April 5, the highest since at least 2002.

Much of Texas, Oklahoma and surrounding states are suffering from “exceptional” drought, the most-severe rating giving by the University of Nebraska at Lincoln’s U.S. Drought Monitor. The past 10 months have been the driest ever in Texas. Pasture and range conditions were rated “very poor” or “poor” in 96 percent of the state, USDA data show.

In the U.S., the world’s leading beef producer and second- largest exporter, 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 typically corn before the animals weigh about 1,200 pounds, when they are sold to meatpackers. Brazil is the top shipper.

‘Prices Come Down’

“When you have an increase in placements, prices will usually come down,” said Ann H. Gurkin, an analyst at Richmond, Virginia-based Davenport & Co. who has a “buy” rating on Tyson. Meat-processor “demand is steady for cattle, and exports will remain strong,” she said.

Cattle futures for October delivery dropped 2.3 percent to $1.174 a pound on the Chicago Mercantile Exchange yesterday, the biggest decline since May. The price has surged 22 percent in the past year as importers increased demand for U.S. beef.

In the first half of 2011, U.S. exporters shipped 620,851 metric tons (1.4 billion pounds) of beef, up 25 percent from 2010, while the value of shipments jumped 40 percent, the U.S. Meat Export Federation said on Aug. 12.

Springdale, Arkansas-based Tyson, a processor of beef, poultry and pork that is the biggest U.S. meat company, declined to comment on how an increase in placements might affect its business.

Retail Beef

Consumers may pay as much as 8 percent more for beef this year, the biggest gain of any food group, according to the most recent USDA forecast. U.S. retail-beef prices rose to $4.443 a pound in June, near the record $4.444 in April, the USDA said on July 15.

Denver-based Chipotle will increase menu prices at most of its restaurants as costs increased for avocados and meat, primarily beef, Chief Financial Officer Jack Hartung said in a July 19 conference call.

The total feedlot herd probably totaled 10.577 million head on Aug. 1, up 7.1 percent from a year earlier, according to the Bloomberg survey. That would be the biggest for the month since 2007.

To contact the reporter on this story: Brian Chappatta in Chicago at bchappatta@bloomberg.net

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

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