Oct. 14 (Bloomberg) -- Cattle futures rallied to a record for the second time this month on signs that rising demand for U.S. beef will erode supplies that are shrinking as ranchers reduce the size of their herds.
Beef output will drop 4.9 percent next year after high feed costs led ranchers to slaughter more breeding cows, the U.S. Department of Agriculture said Oct. 12. The cattle herd totaled 100 million head on July 1, the lowest for that date since at least 1973. Beef exports this year through August were up 27 percent, and meat producers say yesterday’s approval of three U.S. free-trade agreements will boost sales further.
Cattle futures have surged 25 percent in the past year, and the government said last month that retail-beef prices will rise by as much as 9 percent this year, more than any other major food group. Increased costs are squeezing profit margins for restaurant owners including Texas Roadhouse Inc. and Cracker Barrel Old Country Store Inc.
“Supply deficits plus improved export demand are the key drivers,” Rich Nelson, the director of research at broker Allendale Inc. in McHenry, Illinois, said in a telephone interview. “There’s a need for beef around the world.”
Cattle futures for December delivery climbed 0.3 percent to $1.232 a pound at 1 p.m. on the Chicago Mercantile Exchange, after reaching $1.243, the highest ever for a most-active contract, capping a 1.1 percent gain for the week. Prices last reached a record on Oct. 3.
Feeder-cattle futures for November delivery rose 0.7 percent to $1.44425 a pound on the CME. Hog futures for December delivery advanced 2.3 percent to 90.075 cents a pound, after touching 90.725 cents, the highest since Aug. 9.
Congress approved free-trade agreements yesterday with South Korea, Colombia and Panama, bringing an end to years of stalemate among U.S. lawmakers and offering what supporters said was the biggest opportunity for exporters in decades. The bills go to President Barack Obama for approval.
“We’re going to be moving a lot more beef overseas, and that’s going to be the driver in price here,” Lane Broadbent, a vice president of KIS Futures Inc. in Oklahoma City, said in a telephone interview.
The U.S. Meat Export Federation expects beef shipments to climb by about $517 million, or 13 percent, over the next 15 years as duties on U.S. shipments are phased out. The Korea agreement would cut levies of 40 percent on U.S. beef to zero percent over 15 years, dropping 2.7 percent each year, the Denver-based group said.
“We are the only beef-exporting country that has an FTA with Korea,” Erin Borror, a federation economist, said in a telephone interview. “The reduction in the cost of U.S. beef for Korean consumers is going to help us more quickly regain our dominant market share.”
This year through August, the U.S. exported 276.9 million pounds of beef and veal to South Korea, up 50 percent from a year earlier, USDA data show. Only Mexico, Canada and Japan have purchased more.
Cattle futures also got a boost from the rally in commodities. The Standard & Poor’s GSCI Index of 24 raw materials is headed for its biggest weekly gain in 10 months as Group of 20 leaders began talks on ways to tame Europe’s debt crisis.
The dollar has dropped 2.7 percent this week against six major currencies, the most since May 2009, boosting the appeal of U.S. goods for importing countries.
“We have the cheapest meat in the world because our dollar is cheap enough,” Troy Vetterkind, the owner of Vetterkind Cattle Brokerage in Chicago, said in a telephone interview.
Wholesale-beef prices are up 21 percent in the past year, and the retail cost for consumers reached a record $4.489 a pound in August, USDA data show. “We can expect higher prices yet,” Vetterkind said.
Higher beef costs led to two menu-price increases this year at Louisville, Kentucky-based Texas Roadhouse, with more than 350 restaurants across 46 states, and at Cracker Barrel, which has more than 600 locations in 42 states.
Lebanon, Tennessee-based Cracker Barrel will raise prices 2 percent to 3 percent more next year, with beef being the most significant commodity cost increase, Chief Financial Officer Lawrence Hyatt said in a conference call on Sept. 13.
The worst drought in Texas history has parched pastures and forced ranchers to shrink livestock herds rather than incur higher costs to buy feed grain. The 11 months through August were the driest since at least 1895 in Texas. Agricultural losses in the state reached a record $5.2 billion, Texas A&M University estimated in August.
Texas cattle ranchers, the biggest suppliers in the world’s top beef-producing nation, are expected to cull the most breeding cows ever this year.
“We’ve had significant beef-cow liquidation,” the Meat Export Federation’s Borror said. “We expect that contraction to have a bigger impact on beef production in late 2012.”
Feedlots bought 2.252 million head of cattle in August, down 0.8 percent from a year earlier, the USDA said Sept. 23.
“The drought forced a lot of cows into the slaughter chain already,” Vetterkind said. “The younger feeder cattle are already in the feedlots and are going to be slaughtered by April of next year.”
The drought’s effects are mounting to “a severe meat deficit in terms of supply in the southern Plains” in 2012, Nelson said.
U.S. beef output may slump to 25.14 billion pounds next year from an estimated 26.42 billion this year, the USDA said in a report on Oct. 12.
--Editors: Steve Stroth, Daniel Enoch
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