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Pink Slime No Brake to Beef Rally as U.S. Herd Contracts

The U.S. cattle herd has shrunk to the smallest since three years before Ray Kroc opened his first McDonald’s Corp. (MCD) hamburger stand, reducing supply and raising prices even as domestic demand sinks to a two-decade low.

Beef output in the U.S., the biggest producer, will drop for a third year in 2013 after drought destroyed pastures, forcing farmers to cull herds to the smallest since 1952, government data show. Cattle futures traded in Chicago may rise to a record $1.33 a pound by year-end, according to Ron Plain, a livestock economist at the University of Missouri at Columbia who has advised the U.S. Department of Agriculture.

Rising prices are shoring up income for farmers contending with consumer concern over a type of treated meat dubbed “pink slime” and a case of mad cow disease in April. While U.S. beef consumption is contracting for a sixth year, exports last year were the highest ever. Global retail-meat costs gained 4.8 percent since February 2011 even as an overall food gauge tumbled 14 percent from a record, United Nations data show.

“The U.S. beef-cattle herd is at its lowest level in 50 or 60 years at the same time that global consumption of increased protein content and quality foods is rising,” said Steve Shafer, the chief investment officer at Covenant Global Investors, an Oklahoma City-based hedge fund that manages $320 million of assets. “Over the next three to five years, the supply-and-demand dynamics are tighter supplies with growing demand, which equals higher prices.”

Smaller Herd

Cattle futures on the Chicago Mercantile Exchange rose 16 percent in the past year, second only to feeder cattle among 24 commodities tracked by the Standard & Poor’s GSCI Spot gauge, which slumped 17 percent. Feeder cattle are animals being fattened prior to slaughter. The MSCI All-Country World Index (MXWD) of equities slid 9 percent in the past 12 months. Treasuries have returned 8.5 percent, a Bank of America Corp. index shows.

Record beef prices predicted for this year by the Livestock Marketing Information Center, a 57-year-old research group based in Denver, may mean higher costs for retailers and restaurants.

Beef and dairy farmers held 90.77 million head of cattle on Jan. 1, 2.1 percent less than a year earlier, the USDA estimates. That was the lowest since 1952, three years before Kroc opened his first McDonald’s restaurant in Des Plaines, Illinois, according to the company’s website. Today, there are about 35,000 restaurants in 119 countries.

Calf Production

Smaller breeding herds mean that calf production in the U.S. has declined for 16 straight years to the lowest since 1950, the University of Missouri’s Plain said. That could mean the highest prices ever, said Plain, who has studied the industry for three decades.

Plain’s forecast of $1.33 is for February futures on the CME. The previous all-time high for a most-active contract is $1.315, reached on Feb. 22. Cattle for August delivery, currently the most-active contract, settled unchanged today at $1.203 at 1 p.m. in Chicago.

Beef output will fall 2 percent to 24.671 billion pounds (11.19 million metric tons) next year, the USDA said in a report released today. That would be the lowest since 1993, government data show.

Shrinking supply may not be enough to keep prices rising because the outlook for demand is “pretty ominous,” said David Kruse, the president of CommStock Investments Inc., a broker in Royal, Iowa, who has studied the markets since the 1970s. Slowing growth from Europe to China and concern that the U.S. economy may falter will hurt the cattle market, he said.

Chinese Expansion

JPMorgan Chase & Co. in New York lowered its forecast for third-quarter economic growth in the U.S. to 2 percent from 3 percent after the government said June 1 that employers in May added the fewest workers in a year. Expansion in China will slow to 7.9 percent in the second quarter from 8.1 percent in the first quarter, according to the median of 21 economist estimates compiled by Bloomberg.

U.S. beef consumption is forecast by the USDA at 11.359 million tons, the lowest since 1993, partly as people eat more pork. Wholesale-beef prices reached an eight-month low in April. Consumers curbed purchases and some retailers stopped selling products containing lean, finely textured beef dubbed “pink slime” by food activists because it was made from beef trimmings and treated with ammonia hydroxide to kill pathogens.

Cattle futures plunged by the exchange limit on April 24, when the U.S. reported its first case of mad cow disease since 2006. Prices have since rebounded 7.8 percent on signs that the case was isolated and importers didn’t halt purchases like they did in 2003, when the first case of bovine spongiform encephalopathy, or BSE, was found in a Washington state cow. The following year, U.S. beef exports plummeted 82 percent.

Livestock Markets

Last year was the first time that U.S. beef exports exceeded those of 2003, and the most recent case of BSE was a “non-issue” for the market, said Chris Hurt, an agricultural economist at Purdue University in West Lafayette, Indiana, who has been studying the livestock markets for about 40 years.

The U.S. had three cases of mad cow since 2003, Canada 17 and the U.K. 817, according to the World Organisation for Animal Health. There have been about 187,666 cases reported worldwide since 1989, with 97 percent of those originating in the U.K., the Paris-based group’s data show.

Tight U.S. supplies will constrain beef shipments next year, the USDA said in a report May 10. Exports may drop 0.9 percent to 2.65 billion pounds next year, from an estimated 2.675 billion in 2012, USDA data show.

Ranch Profit

Cattle futures last year averaged $1.1575, a record. The contract started on the CME in 1964. The U.S. had 734,000 beef- cow operations in 2011, according to a February USDA report, and there were 30.8 million beef cows in the herd that year as of Jan. 1, for about 42 head per farm. The average beef-cattle business had estimated net-cash income of $27,100 in 2011, the highest since 2007, USDA data show. Income is forecast at $21,400 this year.

The wholesale-beef market survived BSE and pink slime “without serious price damage,” the USDA said in a report May 16. Beef Products Inc., the Dakota Dunes, South Dakota-based maker of the ammonia-treated meat, cut more than 700 jobs and closed three of its four plants. While the USDA has said the meat is safe, fast-food chains including McDonald’s have stopped using it.

Shrinking cattle herds already are boosting costs for consumers. Ground beef in the U.S. averaged $3.016 a pound in March, the highest since at least 1984, and boneless sirloin steak prices are up 5.8 percent this year, according to Bureau of Labor Statistics data. Retail-beef prices reached an all-time high in March, USDA data show.

Beef Inflation

Costco Wholesale Corp. (COST), the largest U.S. warehouse-club chain, is facing rising beef prices this year, unlike most other food items, Richard Galanti, the chief financial officer of the Issaquah, Washington-based retailer, said on a conference call with analysts May 24.

Raw-material costs may climb 4 percent to 5 percent this year for Wendy’s Co. (WEN), CFO Stephen Hare said on a conference call May 8. The Dublin, Ohio-based restaurant chain expects beef prices will be “back up” in the fourth quarter, he said. Beef accounts for about 20 percent of the company’s commodity costs.

Other restaurants from Jack in the Box Inc. to Chipotle Mexican Grill Inc. (CMG) to Texas Roadhouse Inc. told investors in the past several months they expect beef prices to keep climbing.

Texas Drought

Cattle producers are still recovering from last year’s drought in the Great Plains, which destroyed pastures and caused $7.62 billion in farm losses in Texas, the biggest U.S. cattle producer, state data show.

Profit is rising for those ranchers who have cattle left to sell to feedlots, and returns over cash costs may reach an all- time high of $230 per cow in 2012, according to estimates from the Livestock Marketing Information Center.

“We’re enjoying these record prices,” said Richard Thorpe, 54, who runs a cow-calf business in Winters, Texas, and reduced his herd by 70 percent last year because of drought. “We just need Mother Nature to cooperate so that we can get out of this rough time period and get back in the business of raising cattle.”

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

To contact the editor responsible for this story: Patrick McKiernan at pmckiernan@bloomberg.net

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