Shrinking Cattle Herd Signals Beef Rising to Record, Higher Wendy’s Costs
The U.S. cattle herd as of July 1 probably shrunk to the smallest on record, signaling tightening beef supplies and higher costs for shoppers and companies from Tyson Foods Inc. (TSN) to Wendy’s Co.
Ranchers held 99.39 million head of cattle as of July 1, down 1.4 percent from a year earlier, according to the average estimate of nine analysts surveyed by Bloomberg News. That would be the smallest July herd since at least 1973, when the U.S. Department of Agriculture data begins. The government plans to release its semiannual report on the herd at 3 p.m. today in Washington.
“If you’ve got fewer cattle, ultimately you’re going to have less beef,” Ron Plain, a livestock economist at the University of Missouri in Columbia, said yesterday in a telephone interview. “We’re going to have new record cattle and beef prices in 2012.”
Cattle futures, which climbed to a record $1.21625 a pound on April 4, may climb to $1.23 as early as October and $1.25 as soon as March, said Plain, who has studied the industry for three decades. The size of the current herd is probably the lowest since the 1950s, he said.
On April 5, wholesale choice beef reached $1.9196 a pound, the highest since at least 2004, government data show. Retail prices rose to $4.443 a pound in June, close to the record high in April. Beef costs will jump as much as 8 percent this year, more than any major food group, the USDA has said.
Cattle futures for October delivery rose 0.1 cent to $1.154 yesterday on the Chicago Mercantile Exchange. The price has climbed 22 percent in the past year.
Conditions for cattle have deteriorated amid the most- severe drought in Texas in a least a century and adverse weather in the South.
More than 62 percent of the land area in a six-state region is experiencing “extreme” drought, according to the U.S. Drought Monitor. Pasture and range conditions were rated “poor” or “very poor” in 86 percent of Texas, the biggest cattle-producing state, in the week ended July 12.
The drought is a “game-changer” for inventories, Jim Robb, the director of the Livestock Marketing Information Center, a Denver-based research organization funded by universities, the industry and government, said yesterday in a telephone interview.
“We are slaughtering animals that are potential productive-breeding animals,” Robb said. “They are going into feedlots and beef-production systems. We’re not holding heifers for future breeding herd growth.”
Meatpackers, retailers and restaurants will face higher costs, Robb said. “Margins in cattle feeding and the beef packing will be under pressure due to the tight cattle supplies. Margin pressure on everyone but the primary producers, which is the cow-calf operation, is going to increase over the next few years.”
Wendy’s, a U.S. fast-food chain, said last month that its beef costs are projected to rise 20 percent this year. CKE Restaurants Inc., the owner of the Hardee’s chain, cited higher meat expenses in its review of quarterly earnings.
Cattle ranchers in the U.S. will make about $100 a head this year, up from an estimated $50 per cow last year, following losses of about $30 in 2009, Plain of the University of Missouri said. Producers still aren’t expanding because of the sluggish economy and short-term cash-flow concerns, he said.
Calves have nine-month gestation periods and take 20 months to reach slaughter weight, Plain said. Ranchers would rather cut back on herds and sell animals to generate cash, while reducing feed costs, he said.
The price of corn, the main ingredient in livestock feed, has climbed 71 percent in the past year. On June 10, futures reached a record $7.9975 a bushel on the Chicago Board of Trade.
Rising beef exports and declining imports are helping to tighten domestic supplies, Robb of the livestock center said. U.S. per-capita beef supplies may drop to 58.4 pounds (26.5 kilograms) this year, the smallest since at least 1955, and to 56.4 pounds next year, he said.
U.S. exports have climbed 27 percent in the five months ended May 31 from a year earlier, government data show. U.S. beef production may be 26.2 billion pounds (11.9 million metric tons) this year, down 0.7 percent from 2010, the USDA has said. Output in 2012 may drop to 25.1 billion pounds.
Tyson, the biggest U.S. meat company, declined to comment on the outlook for tighter cattle inventories.
“The recent rise in deferred cattle prices would imply that Tyson’s costs will rise, so the company will have to garner higher beef-selling prices to offset the elevated input costs,” Farha Aslam, a New York-based analyst at Stephens Inc., said in a telephone interview.
She rates the shares “overweight.”
“There is no doubt that the packers will have to pay the high cash prices and have to pass it along in the form of high wholesale beef,” Dennis Smith, a senior account executive at Archer Financial Services Inc. in Chicago, said in a telephone interview. “It’s just going to be a fact of life for Americans: record-high meat prices.”
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