Falling Cattle Sales Signal Shrinking Beef Supply, Record Prices

U.S. feedlots probably reduced cattle purchases in April by the most in three years, signaling tighter beef supplies and a rebound in prices, and raising costs for consumers and restaurants from Texas Roadhouse Inc. (TXRH) to Wendy’s Co.

Purchases probably fell 12 percent to 1.563 million head from a year earlier, according to a Bloomberg News survey of 13 analysts. That would be the biggest year-over-year decline since May 2009. The U.S. Department of Agriculture will report on feedlot supplies at 3 p.m. in Washington.

Fewer animals were available for sale after a drought destroyed pastures, causing a record $7.62 billion in farm losses in Texas, the biggest cattle-producing state, prompting ranchers to cull herds. U.S. beef output will fall to 11.5 million metric tons (25.3 billion pounds) this year, the lowest since 2005, the government forecasts. For the rest of the year, feedlot purchases, or placements, will slide and inventories will shrink, pressuring beef prices higher, said Derrell Peel, an agricultural economist at Oklahoma State University.

For beef prices, “by the second half of the year, it’s entirely possible we’ll be back at record levels, and there’s probably a likelihood that we move even higher in 2013,” Peel, who has been studying the livestock markets for more than 20 years, said in a telephone interview. “The demand is clearly the big uncertainty and the limiting factor. The supply factor will be plenty to push us to higher levels this year and into next year.”

Corn-Fed Beef

In the U.S., the world’s biggest beef producer and third-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 mostly corn before the animals weigh about 1,200 pounds, when they are sold to meatpackers.

The USDA projects U.S. beef production to slide another 2.5 percent in 2013 to 24.661 billion pounds because of “tighter supplies of fed cattle and lower cow slaughter,” the agency said in a May 10 report.

Consumers will pay as much as 5 percent more for beef this year, the biggest increase in costs for any food group except for seafood, the USDA forecast on April 25. Retail-beef prices in April were at $4.669 a pound, little changed from the record in March, USDA data show. There will be “plenty of pressure” for retail prices to go higher, said Peel who is based in Stillwater, Oklahoma.

Demand ‘Unknown’

Demand is “an unknown” for the second half of the year, Peel said. Wholesale-beef prices, a gauge of demand, have lost 1.9 percent this year and reached $1.767 a pound on April 12, an eight-month low, according to the USDA. Prices are still up 7.1 percent from a year earlier.

The outlook for higher beef prices will raise costs for grocers and restaurants. Texas Roadhouse, based in Louisville, Kentucky, said the steakhouse chain raised menu prices in February “to help mitigate” some pressures, including food inflation projected at 7 percent to 7.5 percent for this year, Wayne Kent Taylor, the chief executive officer, said on an earnings conference call with analysts on April 30.

The majority of the company’s food inflation comes from the “protein side of things.” with beef making up 40 percent to 45 percent of the chain’s food costs, Chief Financial Officer G. Price Cooper said during a May 9 presentation at the Robert W. Baird Growth Stock conference.

Wendy’s Costs

Raw-material costs may climb 4 percent to 5 percent this year for Wendy’s, Stephen Hare, the chief financial officer, said on an earnings conference call with analysts on May 8. Costs for beef, which makes up about 20 percent of the company’s commodity basket, are seeing “ a little bit of relief,” he said, adding that in the fourth quarter, the Dublin, Ohio-based chain expects beef prices will be “back up.”

More cattle were sold to feedlots in June, July, September, November and February than in the same months a year earlier as the prolonged southern drought spurred ranchers to move more animals off pastures and sell young animals earlier than normal.

“Going forward, the cattle-on-feed numbers should begin to show year-to-year declines for quite a while,” Bob Price, a livestock analyst at North America Risk Management, said in an e-mailed report. “Cattle prices have held together quite well given the numbers that have been available. Demand will be the main determinant of prices in the next few years as supplies should tighten significantly.”

Cattle futures for August delivery rose 0.9 percent to $1.2005 a pound yesterday on the Chicago Mercantile Exchange, and feeder-cattle futures for August settlement climbed 1 percent to $1.59925 a pound.

The feedlot herd probably totaled 11.214 million head on May 1, up 0.3 percent from a year earlier, according to the Bloomberg survey. Producers sold about 1.777 million fattened cattle to slaughterhouses in April, down 1.7 percent from a year earlier, analysts 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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