A customer holds his Big Mac burger at a McDonald's restaurant in London, on February 1, 2010 © Jason Alden, Bloomberg via Getty Images

U.S. beef production is plunging to a 21-year low after surging feed costs spurred ranchers to cut herds, signaling record prices for consumers and higher costs for buyers from McDonald's Corp. (MCD) to Ruth's Chris Steak House.

Production in the U.S. will decline 4.9% to 10.93 million metric tons in 2014, retreating for a fourth year, the government says. The herd on July 1 was the smallest for that date since at least 1973, according to the average of four analyst estimates compiled by Bloomberg. The most-active cattle futures will rise 6% to $1.33 a pound next year, a level last seen in February, the median of nine forecasts shows.

Ranchers still haven't recovered from last year's drought that sent grain costs to a record and spurred them to slaughter more cattle. While feed costs are now slumping as U.S. farms prepare to reap the biggest corn crop ever, it takes more than two years to raise enough animals to expand supply. Retail ground-beef prices in June were up 13% from a year earlier and near a record set in January.

"The drought has really affected the cow herd," said Tucker Hughes, a 65-year-old rancher in Stanford, Mont., who predicted the number of animals he retains for breeding may drop as much as 20% over the next two years. "Some people had to downsize their herds. When you get these droughts, you have to reduce your numbers."

Cattle rebound

Traders are anticipating that this year's 5.1% drop in futures to $1.25525 a pound on the Chicago Mercantile Exchange will reverse. Their prediction would take prices close to the record of $1.35175 reached Jan. 11. Futures averaged about $1.249 since the start of January, heading for the highest-ever annual level.

The Standard & Poor's GSCI Agriculture Index of eight commodities fell 17% this year, and the MSCI All-Country World Index of equities rose 10%. Treasuries lost 2.6%, the Bloomberg U.S. Treasury Bond Index shows.

McDonald's, the world's largest restaurant chain, probably will pay 2.5% to 3.5% more for beef this year, according to Jack Russo, a St. Louis-based analyst at Edward Jones & Co. That's more than the forecast 1.5% to 2.5% increase in total commodity costs that Chief Financial Officer Peter Bensen predicted on a July 22 conference call.

While the Oak Brook, Ill.-based company will consider charging more for food, competition and price-sensitive consumers mean "we have less pricing power in 2013 versus a year ago," Bensen said.

Higher prices

Wholesale beef prices dropped 12% since reaching a record $2.1137 a pound on May 23, as the acceleration in slaughtering boosted supply, government data show. Prices probably will exceed that peak next year, said Ron Plain, a livestock economist at the University of Missouri in Columbia.

Global meat prices rose 2.1% in June, the most in nine months, while the overall cost of food dropped 0.9% to the lowest since February, United Nations data show. Retail ground beef averaged $3.382 a pound in June, the second-most ever behind the record of $3.407 in January, Bureau of Labor Statistics data show. Prices will top the record next year, said Steve Meyer, president of Paragon Economics in Adel, Iowa. The government estimates consumers will pay as much as 3.5% more for beef in 2014.

Beef costs for Ruth's Hospitality Group Inc. (RUTH), the Heathrow, Fla.-based steakhouse owner, climbed 17% over two years, Chief Financial Officer Arne Haak said during a presentation on June 25. The restaurant raised its prices in February. Next year and 2015 will still be tough because of the lack of supply, Chief Executive Officer Michael O'Donnell said in a presentation June 18.

Slowing demand

Higher prices are curbing demand, with U.S. beef shipments tracked by the government down 2% this year through May. The dollar's rally to a three-year high in July is also eroding the appeal of U.S. exports and China and Russia are restricting meat with ractopamine, a feed additive that some U.S. producers use to increase lean muscle.

Cheaper feed and the easing drought conditions in most places may encourage ranchers to expand. Corn futures on the Chicago Board of Trade are now 44% lower than the record reached in August. The USDA rated 44 percent of pasture and rangeland in good or excellent condition in the week ended July 28, compared with 17% a year earlier.

"There's an awful lot of people wanting to expand," said Steve Foglesong, 56, who raises 9,000 head of cattle and farms 1,800 acres of corn and soybeans about 65 miles southwest of Peoria, Ill. "The market signals are kind of there."