Cattle Seen at Record $1.36 per Pound as Drought Reduces Herd: Commodities

Texas cattle ranchers, the biggest suppliers in the world’s top beef-producing nation, will cull the most breeding cows ever this year as drought increases feed costs, driving livestock prices to a record.

Cattle futures that gained 18 percent in the past year in Chicago may reach an all-time high of $1.36 a pound in as few as seven months, said Rich Nelson, the director of research at McHenry, Illinois-based Allendale Inc., who has been studying agricultural markets since 1997. Feed costs have surged, with corn heading for the highest annual average price ever.

The 11 months through August were the driest since at least 1895 in Texas, and the state’s farm losses may top $5.2 billion. Ranchers may sell or slaughter 500,000 beef cows they would normally keep for breeding because it’s too expensive to feed them, Texas A&M University estimated. Tighter supply in the $51.5 billion U.S. cattle industry is boosting global meat costs already rising faster than any other food group.

“We’re going to be talking about a historically large reduction in beef-cow numbers,” said David Anderson, an economist at the university’s Texas AgriLife Extension Service in College Station, Texas, who has been following the livestock industry for almost two decades. “If nothing else changes, that’s tighter supplies and less beef and higher prices.”

Global food prices are within 3 percent of the record reached in February, according to a United Nations gauge of 55 commodities. The meat component of the index has more than doubled since 2002 and is up 8.7 percent this year, more than the changes in dairy, cereals, sugar, oils and fats.

Topping Record

Nelson’s forecast of $1.36 a pound is for the April contract traded on the Chicago Mercantile Exchange. Futures for December delivery rose 1.1 percent to settle at $1.192 at 1 p.m. in Chicago. The record for a most-active contract is $1.21625 on April 4. Cattle, while up twice as much as hogs in the past year, trailed the 21 percent gain in the Standard & Poor’s GSCI gauge of commodities as silver, gasoline and gold rose more than 38 percent.

Corn, the biggest ingredient in livestock feed, surged 36 percent on the Chicago Board of Trade in the past year, while cattle gained 18 percent. Prices averaged $6.995 a bushel since the start of January. In June, corn was the most expensive relative to cattle in almost three years. U.S. corn yields will drop to a six-year low, the government said Sept. 12.

‘Exceptional’ Drought

The U.S. Drought Monitor estimates 88 percent of Texas is suffering from “exceptional” drought. Ninety-eight percent of pastures are in poor or very poor condition, government data show. A 1,000-pound (454-kilogram) bale of hay costs $70 to $100, up from $30 to $35 a year ago, said Bill Hyman, the executive director of the Independent Cattlemen’s Association of Texas, which represents about 8,000 ranchers.

The largest share of beef cows leaving Texas this year will be slaughtered, while the rest will be sold or moved to states with better pastures, Anderson said. As those animals depart, high feed costs mean fewer replacement heifers will be brought into the herd this year, he said.

Ranchers typically start feeding animals hay in December or January, when temperatures drop and the grass dies, Hyman said. This year, some farmers haven’t stopped feeding hay since winter as grass withered, he said.

Farms are sending young cattle to feedlots earlier than normal and slaughtering more beef cows because pastures have no grass, said Ron Plain, a livestock economist at the University of Missouri in Columbia. With fewer cows left for breeding, the herd will produce less calves next year, he said.

Fatten on Feedlots

Feedlots buy year-old animals that weigh 500 pounds to 800 pounds, called feeders. The cattle are fattened on corn for about four to five months until they weigh about 1,200 pounds, when they are sold to meatpackers.

The increased cull may mean accelerated meat supply in the next several months, limiting the rally in prices. The rising slaughter rate and movement of animals into feedlots indicate there will be “adequate supplies” into the first quarter of 2012 to meet demand, Allendale’s Nelson said. That means a “moderate bull market” in cattle futures will accelerate in the second quarter of 2012 as supply contracts, he said.

U.S. exporters shipped 1.6 billion pounds (729,000 metric tons) of beef in the seven months through July 31, 27 percent more than a year earlier, government data show. The biggest buyers were Canada, Mexico and Japan.

Export Supply

“The higher prices that will result from this drought will cap upside potential in beef exports,” said Jim Robb, the director of the Livestock Marketing Information Center, a Denver-based research organization. “We just won’t have supplies to support significant further growth in exports.”

Tighter supplies will mean higher prices. Texas Roadhouse Inc. (TXRH), based in Louisville, Kentucky, already raised prices at its steakhouses twice this year. The company has more than 350 restaurants across 46 states, each with a butcher cutting about 300 pounds of beef a week. Atlanta-based Wendy’s Co. is adding more chicken products on its menus as “significant increases” in beef costs pressured profit margins.

Ground beef in the U.S. averaged $2.819 a pound in August, the highest since at least 1984, and boneless sirloin steak prices were up 11 percent from a year earlier, according to government data. Retail beef prices reached an all-time high in August, the data show.

Beef will rise as much as 8 percent this year in the U.S., twice the rate of the increase in overall food costs and more than any other food group, the U.S. Department of Agriculture estimates.

Leaner Herd

Increased commodity costs may force restaurants to charge even more next year, said Peter Saleh, an analyst at Telsey Advisory Group, an equity researcher and consultant in New York.

“Drought, which results in leaner herd sizes and higher beef prices, is definitely not a good sign for those guys,” Saleh said. “I suspect restaurants will continue that trend in 2012 to raise prices.”

Per-capita beef supplies in the U.S. may shrink to 55.6 pounds next year, the lowest since at least 1955, according to Livestock Marketing Information Center. The slaughter of beef cows this year is the highest since 1996, Allendale estimates.

The drought reaches beyond Texas. Oklahoma, the second- biggest beef cow-producing state, had the hottest June through August on record, with a statewide average temperature of 86.8 degrees Fahrenheit (30.4 Celsius), according to the Oklahoma Climatological Survey.

Oklahoma Drought

The Oklahoma beef-cow herd may drop about 12 percent this year, said Derrell Peel, an agricultural economist at Oklahoma State University in Stillwater. That will be more than any other previous drought-induced decline in the state, he said.

The U.S. cattle herd by July 1 totaled 100 million head, the smallest for that time of year since at least 1973, the government said in a report on July 22. The beef-cow herd in Texas totaled 5.025 million as of Jan. 1, the lowest since 1963.

Jim Selman, an 80-year-old cattle rancher in Gonzales County, Texas, said he is reducing his herd of 200 beef cows by 50 percent because it costs more to feed them than they would be worth in a sale to a slaughterhouse.

“Even if we got rain tomorrow, we wouldn’t have grass until April,” Selman said. “Rather than feed up the value of my cows, I’m just going to go ahead and sell them.”

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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