Cow Prices Jump Over the Moon
Drought-Induced Shortage Leads to Record Amounts Paid for Cattle
Cattle at a feedyard in Calexico, Calif., earlier this year. DPA/ZUMA PRESS
CHICAGO—U.S. cattle prices are surging again, a fresh blow to consumers already stung by record costs for steaks and ground beef.
Live-cattle futures leapt to an all-time high of $1.705 a pound last week, reflecting concerns that domestic cattle supplies are even tighter than many analysts expected. Futures have risen 11% since mid-August and 23% for the year, among the best-performing U.S. commodities.
Analysts said the latest jump in cattle prices likely would be passed along to grocery shoppers in the next few months. That would push up retail fresh-beef prices that soared to a record $5.924 a pound in September, a 20% increase over a year ago, according to the U.S. Department of Agriculture.
Cattle and beef prices have spiked in the past several years as drought in the southern U.S. Great Plains dried out pastures and raised costs for hay and other feed, forcing ranchers to cull herds. Now, weather conditions are improving, prompting ranchers to hold on to more breeding animals in order to expand herds. While the rebuilding efforts could ease supply constraints in coming years, they are curtailing the number of cattle moving through the supply chain now.
U.S. beef production will tumble 5.3% this year, to 24.4 billion pounds, the USDA estimates, a shortfall that is driving up beef costs for restaurants, grocery stores and food-service companies.
“It’s a nightmare,” said Andy Wiederhorn, chief executive of Beverly Hills, Calif.-based burger chain Fatburger North America Inc. “The forecasts for beef have been consistently wrong and price increases significantly higher” than expected earlier in the year.
Fatburger, which has about 150 restaurants in 30 countries, has raised some burger prices this year, generally by 25 to 50 cents, in an effort to keep the closely held company’s profit margins stable, Mr. Wiederhorn said.
On Thursday, live-cattle futures rose 0.15 cent, or 0.1%, to $1.6535 a pound at the Chicago Mercantile Exchange, about five cents shy of last week’s record.
The upward march of cattle prices has prompted federal forecasters to make many revisions to beef-inflation estimates. Last month, the USDA reckoned consumer prices would jump as much as 11.5% this year, which would be the biggest gain since 2004 and by far the largest increase of any food category. Only a month earlier, the USDA was projecting a rise of up to 9%.
“Everyone overestimated beef production this year,” said Larry Hicks, owner of agricultural-advisory firm CattleHedging.com in Centennial, Colo.
Cattle futures cooled in late spring, weighed down by softer beef demand from retailers and restaurants. But a series of USDA reports since then have surprised traders by showing smaller-than-expected supplies. In September, the number of cattle on U.S. feedlots—operations that fatten cattle for slaughter and sell them to meatpackers—fell 1% from a year earlier, to 10.06 million. That marked the 26th straight month of year-over-year declines, according to an Oct. 24 USDA report.
The report also showed that the U.S. on Oct. 1 had 3% fewer young female cattle in feedlots than a year earlier—a sign to traders that ranchers are keeping breeding animals to replenish herds.
That prompted more money managers to buy cattle futures, according to analysts.
Heavy rains this spring and summer restored pastures in parts of major cattle-producing states, including Texas and Kansas, encouraging more ranchers to expand supplies. But herd rebuilding is a slow process. A cow’s gestation period is nine months, normally resulting in one calf a year. That calf typically won’t reach slaughter weight until it is 12 to 22 months old. In contrast, hog and chicken producers can ramp up production more quickly.
“We saw this coming two years ago and knew there would be supply problems, but no one could have foreseen just how strong [the cattle] market would become,” said Adam Stout, an analyst with brokerage INTL FCStone in Kansas City, Mo.
The price surge has been a boon to producers, who have watched feedlot operators and meatpackers compete more aggressively to secure supplies of steers and heifers.
“It’s a good time to be in the business,” said Aaron Amstutz, a grain farmer and cattle rancher in Bloomfield, Iowa, who raises 350 cows and typically sells their offspring each year.
Some analysts think cattle prices may have peaked for the near term. They argue beef prices are so high that more consumers are likely to switch to lower-price meats such as chicken and pork. Beef sales volumes in recent years have declined, while chicken volumes have ticked higher.
“On the supply side, we’ve already pushed prices beyond what we can support from a consumer standpoint,” said Mr. Hicks of CattleHedging.com.
The USDA estimates that U.S. pork and chicken production will rise next year, while beef production will decline again. That could make prices for chicken and pork even more attractive to consumers, further pinching beef consumption.
“An increase in available pork and chicken is going to take the wind out of the sails in the beef market for both domestic and export buyers,” said Chris Hurt, agricultural economist at Purdue University. “Some people will continue to pay high prices for steaks, but many buyers are cautious right now.”
