Why beef prices are about to get even higher

Below-freezing weather is adding more costs to cattle farmers across the country. Output in the US may drop to the lowest since 1994.

By MSN Money Partner Jan 14, 2014 2:27PM
By Elizabeth Campbell, Bloomberg

As temperatures dipped to a record minus 25 degrees Fahrenheit, the crew at Dean Wang's ranch in Baker, Mont., increased alfalfa-hay rations to give his cattle more energy during the arctic blast.

"Cattle are requiring more feed in order to just maintain their body temperature, instead of putting that extra energy into gaining weight," said Wang, 46, who has about 850 cows that will calve this spring and 550 young cattle. "This year, everyone started feeding a little earlier than what they would have liked, because of the heavy snow and the cold."

The deep freeze that swept across the U.S. last week, disrupting travel and boosting fuel use, is compounding stress on a shrinking domestic beef industry already struggling with high costs and weather shocks. While crops from oranges to winter wheat avoided major damage, the cold slowed the growth of livestock and extended a rally in Chicago cattle futures to a record, signaling higher beef costs for restaurants including McDonald's (MCD) and Texas Roadhouse (TXRH). 

The U.S. cattle herd contracted for six straight years to the smallest since 1952, government data show. A record drought in 2011 destroyed pastures in Texas, the top producing state, followed the next year by a surge in feed-grain prices during the worst Midwest dry spell since the 1930s. Fewer cattle will mean production in the $85 billion beef industry drops to a 20-year low in 2014, the U.S. Department of Agriculture said.

Herd size

"You sell your cattle because you can't afford to feed" them, said Paul Looney, a Mineral, Texas, rancher who serves as the first vice-president for the state's Independent Cattlemen's Association. "We were hit across the board in Texas. Everyone had to reduce herd size, so that impacts the whole beef business, from the ranch to the plate."

Cattle futures rallied 13 percent since the end of June and reached $1.377 a pound on Jan. 9, the highest since trading began on the Chicago Mercantile Exchange in 1964. The Standard & Poor's GSCI gauge of 24 raw materials climbed 0.4 percent in the period, and the MSCI All-Country World Index of equities rose 14 percent. The Bloomberg Treasury Bond Index was little changed.

Prices that settled at $1.37075 yesterday may reach $1.405 in 2014, according to the median of six analyst estimates compiled by Bloomberg. Futures climbed for five straight years through 2013, the longest streak on record.

Commercial beef output in the U.S., the biggest producer, may drop 5.4 percent this year to 24.32 billion pounds (11.03 million metric tons), the lowest since 1994, the USDA said Jan. 10. The herd reached a 61-year low of 89.3 million head as of Jan. 1, 2013. The agency will update its estimate on Jan. 31.

Freezing temperatures tough on animals

Frigid air covered much of the U.S. last week, with the morning temperature in Chicago on Jan. 7 lower than at the South Pole, while the Minnesota towns of Embarrass and Brimson were the coldest in the contiguous U.S. with readings of minus 35, the Weather Prediction Center in College Park, Maryland, reported.

Animals have a harder time generating enough heat to stay warm during cold weather, said Dustin Oedekoven, South Dakota's state veterinarian. If cattle use energy for heat, that takes away from the calories used to put on weight.

Limited impact

The impact of last week’s freeze may be limited because extra feed use is standard for livestock operations during winter months, and "overall, it's not a detriment," said Harry Knobbe, who farms and feeds cattle in West PointNeb.

Cattlemen across the Midwest prepare by bringing animals to winter pastures where there are more natural or man-made shelters from the wind, with some closer to barns, which makes it easier to feed the extra rations.

As temperatures warm back up, animals will get their appetite back and gain weight faster, said Arlan Suderman, a senior market analyst in Wichita, Kan., for Water Street Solutions.

While herds are shrinking, so is U.S. beef demand. Per-capita consumption of the meat may shrink to 53.6 pounds this year, the lowest since at least 1970, the government has projected. Higher grocery bills may be prompting consumers to choose cheaper alternatives, said Dick Quiter, an account executive at McFarland Commodities LLC in Chicago.

Retail ground-beef averaged $3.477 a pound in November, after climbing in September to $3.502, the highest since at least 1984, the latest data from the Bureau of Labor Statistics show. Whole chickens fetched $1.518 a pound in November, while pork chops sold for $3.681 a pound. Per-capita chicken demand may jump 2.8 percent to 83.7 pounds this year as pork consumption rises 0.2 percent to 47 pounds, the USDA predicts.

"It's still a bargain to buy pork and chicken compared to beef," Quiter said. "I just can't imagine that we can keep these kinds of prices for long at that kind of a disparity."

Fewer cattle

The number of cattle in American feedlots was the second-lowest on record on Dec. 1, government data showed. While corn dropped 49 percent since reaching a record $8.49 a bushel in August 2012, prices are still 25 percent higher than the average of the past two decades. Use of the grain in livestock feed will jump 22 percent this year, the USDA forecasts.

Even as domestic beef demand drops, global consumption this year will be the highest since 2008 as higher incomes allow people in emerging economies to afford more protein, according to the USDA. U.S. exports totaled 2.36 billion pounds in the 11 months through Nov. 30, up 4.4 percent from the same period a year earlier, according to the latest government data. Japan, Canada and Mexico were the biggest buyers.Image: Grocery shopping (© Corbis)

Shrinking cattle supplies and higher beef prices are increasing bills for consumers, grocers and restaurants. While total global food costs fell 3.4 percent last year, meat prices climbed 0.5 percent, according to data from the United NationsConsumers may pay as much as 3.5 percent more for beef this year, the USDA has projected.

Costs for beef at Cracker Barrel Old Country Store (CBRL), the Lebanon, Tenn., operator of 625 restaurants across 42 states, were "up sharply" in the three months ended Nov. 1 from a year earlier, Lawrence E. Hyatt, the chief financial officer, said on an earnings conference call with analysts on Nov. 26.

For McDonald's, the world's largest restaurant chain, beef is one of the "biggest impacts on commodity cost" in the U.S., Peter J. Bensen, the chief financial officer, said on an earnings call with analysts on Oct. 21. Texas Roadhouse raised prices in the last two years as the steakhouse chain tries "to fight off what's been pretty high beef inflation," Scott Colosi, the company's president, said Monday during a presentation to investors in Orlando.

Producers have been slow to boost output even after the run-up in prices. It can take three years to breed a cow and raise its calf to slaughter weight.

Texas rancher Looney, who is 64 and has been in the cattle business his whole life, said his herd is still about 90 percent below its size from 2005 because of the prolonged dry weather. It will take years for the pastures to come back, even if there is normal rainfall, he said. About 44 percent of Texas was in still in drought in the week ended Jan. 7, according to the U.S. Drought Monitor.

An unseasonably early storm in the Black Hills region of South Dakota produced as much as 4 feet (1.2 meters) of snow in early October. At least 21,671 South Dakota cattle died because of the blizzard, according to voluntary reports by producers to the state’s animal industry board.

Temperature swings

"It has been really, bone-chillingly cold," said Jodie Anderson, the Pierre, South Dakota-based executive director of the state's Cattlemen's Association. "This is a time of year when folks are generally prepared for the cold. From a producer perspective, it just makes everything much more difficult. You have to make sure equipment will start and remain running, and it will take more time. You have to provide additional calories to those animals so they can stay warmer and have adequate nutrition."

Frigid temperatures may continue to present challenges to ranchers because the recent cold was part of a pattern of extreme weather that occurs every decade or so and has been plaguing the U.S. with temperature swings from mild to freezing for more than a month, said Tom Kines, a meteorologist with AccuWeather Inc. in State College, Penn. The affected region extends across the upper Midwest into the South and eastward to the Atlantic, he said.

"When you get extreme weather conditions like we saw last week, you're going to see some cattle not gain weight like they should," said Lane Broadbent, president of KIS Futures Inc. in Oklahoma City, who has been a commodity broker for more than two decades. "Our supplies are going to be tight, and we're seeing demand overseas improving too. It looks like it's going to be a pretty good 2014 for the cattlemen."

More from Bloomberg

Jan 14, 2014 4:45PM
But remember, there's no inflation... they keep telling us that so it MUST be true. Sugar and milk and beef and pork and etc etc etc have all gone up in price, but there's no inflation.
Jan 14, 2014 2:51PM

We need more global warming so I can afford to eat more cows.


Hippies are going to have a field day with that one...

Jan 14, 2014 5:06PM

You do understand that the cattlemen do not set the price right, the feeders do, and they are dependent on the grain prices. The only ones who make big money off the beef and drive your cost up are the retailers and the processors. You remember the drought 2 years ago, ranchers were dumping cattle because they could not afford to feed them, the beef market got flooded, live cattle prices were way down. Funny thing is the price in the store did not dip one bit. Cattleman did not make money they lost money. Cattle numbers are as low as they have been in years, if we get good pasture and feed this year more ranchers will retain heifers to start re building, which means even less cattle for beef on the market, prices will still go up again.

20 years ago fat steers were selling for 87 cents a pound today it is $1.31 that is about a %50 increase, name anything that has at least not doubled or tripled in price since then. Ranchers cost have more than doubled in the past 20 years and their products price has not stayed up with that pace.. How many of you make at least twice what you did in 1990?

Jan 14, 2014 4:16PM
We need to do something about this global warming before we all freeze to death!
Jan 14, 2014 4:05PM

Ya this is bullsh*t! It is always colder than normal at some point in winter in all cattle raising states.


Just another excuse to raise already unfair prices at the store. Bull pure and simple.

Jan 14, 2014 3:29PM
  Cold winters nothing new in Montana. Coming into the most critical time for future production, dropping those newborns in sub zero conditions can be problematic.
Jan 14, 2014 4:11PM
The high beef prices certainly are not fed by demand. I buy less than half the beef that I did...and probably will continue that trend....
Jan 14, 2014 3:41PM
You know that theory behind limiting the COL increases in Social Security? Well, guess what beef industry!!
Jan 14, 2014 3:21PM
Jan 14, 2014 7:21PM
The way to reduce prices is to quit using corn for fuel. It is bad for gas mileage and it destroys cars.
Jan 14, 2014 6:23PM
The price of burgers will go up..speaking of that, I waited in line at Mc Donalds for 20 minutes yesterday..I got up to the counter and a fat girl said "sorry about the wait"..I told her "don't worry, you'll find a way to lose it eventually". he heh heh
Jan 14, 2014 2:51PM

I thought Corn and Beans, went or were down in prices...And now we have to have weather for an excuse....It never really seems to stop.

So far we have only had one cold blast that I can recall, maybe the rest of winter will be mild?

But the Old Farmer's said it might be bad...??

Jan 14, 2014 4:46PM

The cost of feed goes up?  Maybe you should ask, what feed exactly is increasing the cost?  Hum..

Jan 14, 2014 3:58PM
Dang!  Even though I live in Arizona all that global cooling....er, global warming.....er, climate change, er, seasons are going to make it more expensive for me to eat a delicious steak.
Jan 14, 2014 4:58PM
...SPAM...it's what's for dinner...
Jan 14, 2014 6:38PM
It really doesn't matter if the price of corn, soybeans, barley, and other feed grains may be down slightly in price.  When extreme cold weather strikes anywhere there are cattle, be it north or south, the cattle will eat more (much more) just to survive, let-alone provide nutrients to unborn calves or putting on muscle and fat as feeders.  The other factor is death loss from cold and blizzard conditions.  Cattle don't do well when left to their own resources during blizzards.  They will drift like the snow with the wind until they pile up in a ravine, lake, river bed, or buried in a snow drift.  The end result is fewer breeding stock and shorter supplies of beef to the nation.  Extreme cold and snow creates a domino effect that increases costs for every aspect of providing beef to the country - from increases in feed demand, to increases in labor intensity, to increases in fuel and machine repairs.  It is a condition over which we have absolutely NO control whether or not the politicians, or who have you, blame it on "global warming".  We can either accept it, or eat less meat!!!
Jan 14, 2014 7:18PM
If you cannot afford beef from grass fed pasture raised cows, you are not eating as good as your grandparents or before.

The food chain has been corrupted just like the currency to keep the unsustainable expanding masses  fed and working so the political class stays in power.

Jan 14, 2014 4:47PM
Any move in prices against your desires = MARKET MANIPULATION

Talk about nut jobs.

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