U.S. cattle inventories fell to the lowest in 60 years after a drought in the South scorched pastures, prompting ranchers to shrink herds.
As of Jan. 1, beef and dairy farmers held 90.77 million head of cattle, down 2.1 percent from a year earlier, the U.S. Department of Agriculture said today in a report. That’s the fewest since 1952. Ten analysts in a Bloomberg News survey were expecting a 1.5 percent decline.
“We had one of the biggest droughts in Texas this past year,” Chad Henderson, a market analyst at Prime Agricultural Consultants Inc. in Brookfield, Wisconsin, said in telephone interview before the report. “Guys have been ripping up pasture and planting crops. It’ll take years for this thing to build back up.”
Cattle futures in Chicago surged to a record $1.29675 a pound on Jan. 25. Texas, the top state producer, had its driest year on record in 2011, according to the National Weather Service. The drought destroyed pastures, forcing ranchers to sell or slaughter animals rather than incur feed costs driven up by corn, the main ingredient, which reached an all-time high in 2011.
The beef-cow herd totaled 29.88 million, down 3.1 percent from a revised 30.85 million a year earlier and the lowest for the date in 50 years, the USDA said. Analysts forecast a 2.6 percent decline. The number of young, female cattle for beef-cow replacement rose unexpectedly to 5.21 million, up 1.4 percent. A 1.8 percent drop was forecast.
The heifers that are being held back will be bred this year and produce calves this year or next, Rich Nelson, the director of research at Allendale Inc. in McHenry, Illinois, said in a telephone interview.
“Those heifers are not in the feedlot, so the short-term supply is actually a little tighter, but we are starting expansion for live cattle hitting the market” starting in mid- 2013, he said.
Cattle futures may open 0.2 cent higher on Jan. 30, Nelson said. The contract for April delivery, the most-active, rose 0.4 cent, or 0.3 percent, to close at $1.2845 a pound today on the Chicago Mercantile Exchange. The price has climbed 15 percent in the past year.
Feeder-cattle futures for March settlement gained 0.6 percent to $1.546 a pound.
The USDA on Jan. 12 forecast total beef output at 25.075 billion pounds (11.4 million metric tons) this year, down 4.6 percent from an estimated 26.297 billion in 2011.
Wholesale beef, up 6.4 percent in the past 12 months, reached $1.9707 a pound on Nov. 23, the highest since at least 2004, according to the USDA. Retail beef reached an all-time high on an annual basis in 2011 and will climb through next year, according to the Livestock Marketing Information Center, a Denver-based researcher.
McDonald’s Corp. (MCD), the world’s biggest restaurant chain by revenue with more than 33,000 outlets worldwide, is forecasting higher beef costs. The Oak Brook, Illinois-based company is the largest user of beef among U.S. restaurants, according to CattleFax, an industry researcher in Centennial, Colorado.
McDonald’s will have “another midteens increase” in beef costs this year, Chief Financial Officer Peter J. Bensen said on an earnings conference call with analysts on Jan. 24.
The inventory of heifers for milk-cow replacement totaled 4.53 million on Jan. 1, down 0.9 percent from a year earlier, the USDA said. The average analyst estimate was for a 1.5 percent increase.
In 2011, the total number of calves born fell 1.1 percent to 35.31 million from a year earlier, the lowest since 1950, according to the USDA.
“Fewer calves being born means ultimately fewer cattle will be slaughtered,” said Ron Plain, a livestock economist at the University of Missouri at Columbia, who has studied the industry for three decades, said in a telephone interview. “That means the tight beef supply is going to get tighter as we go through 2012 and 2013 and 2014.”
Once the herd starts to expand, it will take more than two years before beef supplies increase, Plain said. Calves have nine-month gestation periods and take about 20 months to reach slaughter weight, he said.
Tyson Foods Inc., the biggest U.S. meat processor, projects a “gradual reduction” of 1 percent to 2 percent in supplies of cattle available for slaughter during the fiscal year that began Oct. 2, according to a Nov. 21 statement. Supplies will be “adequate” in regions where the Springdale, Arkansas-based company operates beef plants, it said. Most of those are in the Midwest, according to Gary Mickelson, a company spokesman.
“Cattle costs continue to go up, but so do beef prices,” said Akshay Jagdale, a New York-based analyst at KeyBanc Capital Markets who has a “buy” rating on Tyson. Profit margins for meatpackers now “are actually in the red, but we expect that to improve as the year goes along,” he said. “For the full year, we expect them to still be profitable.”
Beef processors may have to adjust plant capacity as cattle supplies shrink, Jagdale said in a telephone interview. Higher beef prices will boost revenue enough to make up for the rise in costs from shrinking supplies, he said.
As supply tightens, exports are surging. The U.S. may ship a record 974,000 metric tons (2.15 billion pounds) of beef, excluding variety meats, in 2012, the U.S. Meat Export Federation said. That’s up 6.5 percent from an estimated 914,500 tons in 2011, the group said.
Consumers may pay as much as 5 percent more for beef this year, the biggest increase among all the food groups except for seafood, the USDA said in a Jan. 25 report. That follows an estimated 10.2 percent rise in the cost of the meat last year, and is projected to be higher than the 3.5 percent jump in total food costs in 2012, the government said.
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