Bloomberg News

Lower Cattle Sales Tighten Beef Supply, Boosting Packer Costs

June 16, 2011

June 16 (Bloomberg) -- Feedlot operators in the U.S. probably bought fewer young cattle in May, signaling tighter beef supplies at the end of the year and higher prices that may trim meatpacker profit.

Purchases fell 7.5 percent to 1.877 million head of cattle last month, compared with May 2010, according to a Bloomberg News survey of 13 analysts. The U.S. Department of Agriculture will report inventories at 3 p.m. tomorrow in Washington.

Fewer animals were available after buying surged in March and April as a drought destroyed pastures in Texas, the biggest cattle-raising state, and forced ranchers to sell more cattle than normal, said John Nalivka at Sterling Marketing Inc., a livestock- and meat-industry consultant. Spot-market steer prices may jump 8.3 percent by year-end, he said.

Reduced supplies will “pressure packer margins beginning in the fourth quarter on out,” said Nalivka, who worked as a USDA cattle analyst in the 1980s and is based in Vale, Oregon. “As we go through and we continue to tighten the supply of cattle, we’ve got too much slaughter capacity. Margins will probably turn negative.”

In the U.S., the leading beef producer and second-largest exporter, feedlots buy year-old cattle that weigh 500 pounds (227 kilograms) to 800 pounds, called feeders. It takes about four or five months on a diet of mostly corn before the animals weigh about 1,200 pounds, when they are sold to meatpackers.

Beef Price Outlook

Slaughter rates will drop 7 percent in the fourth quarter from a year earlier, curbing beef supplies and sending wholesale prices up about 4.7 percent, said Nalivka, who has been studying the cattle markets for more than 30 years and is Sterling Marketing’s president.

While wholesale beef fell 0.5 percent to $1.7194 a pound yesterday, the price is still up 12 percent from a year earlier, government data show. Demand will need to remain strong for prices to climb as expected, Nalivka said.

Retail-beef prices are forecast to rise as much as 8 percent this year, the most of any major food group, according to the USDA, which estimates overall U.S. food costs may rise 4 percent this year, the most since 2008. Global food prices rose in nine of the past 11 months, including a record in February, United Nations data show. Costlier meat has spurred grocery stores and restaurants to pass along the increases to consumers.

Restaurant operator Luby’s Inc. plans to increase prices on some menu items at its Fuddruckers restaurants because of “the significant inflation of beef prices,” Chief Financial Officer Scott Gray said on a conference call June 9.

U.S. retail beef fell to $4.43 a pound in May from a revised record of $4.444 in April, the USDA said yesterday in a report on its website. The price had reached all-time highs in the previous five months.

Southern Drought

Supplies of feeder cattle have dropped after ranchers sold off herds when pastures were destroyed in the Great Plains. More than 60 percent of the South, including Texas and Oklahoma, is experiencing “severe” drought, according to the University of Nebraska’s U.S. Drought Monitor.

“Placements are finally going to start running below year- ago levels, probably until fall, as we have placed quite a few cattle earlier in the year due to the southern drought and because of general supply tightness in available feeder-cattle numbers,” Troy Vetterkind, the owner of Vetterkind Cattle Brokerage in Chicago, said in an e-mail. “This is going to be supply friendly for the fed-cattle market once we get into the fourth quarter of this year and the first quarter of next year.”

Rising Demand

Overseas demand for U.S. beef has pushed prices higher. Cattle futures that reached an all-time high of $1.21625 a pound on April 4, are up 18 percent over the past year. Feeder-cattle futures, which reached a record $1.42 a pound on April 1, are up 14 percent in the past 12 months.

Cattle futures for August delivery fell 0.5 percent to $1.0485 on the Chicago Mercantile Exchange yesterday, while feeder cattle fell 0.2 percent to $1.26975.

U.S. exporters shipped 856.5 million pounds (388,500 metric tons) of beef in the first four months of this year, up 31 percent from a year earlier, the latest government data show. South Korea was the biggest buyer, followed by Mexico and Canada. Brazil is the leading shipper.

The total feedlot herd probably totaled 11.06 million head on June 1, up 5.4 percent from a year earlier, after increased placements in March and April, according to the Bloomberg survey. Producers sold about 1.924 million fattened cattle to slaughterhouses in May, up 3.1 percent from a year earlier, analysts said.

--Editors: Steve Stroth, Jake Lloyd-Smith

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

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net


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