Higher Beef Costs Loom as Feeder Cattle Extend Rally to Record

May 01, 2014 3:14 pm ET

May 1 (Bloomberg) -- Feeder-cattle futures surged to a record to cap the longest rally in 22 years as U.S. ranchers sent fewer animals to slaughter, signaling an increase in beef costs that already are the highest ever.

The feedlot herd at the start of April unexpectedly shrank 0.6 percent from a year earlier, U.S. Department of Agriculture figures showed on April 25. Meatpackers slaughtered 7 percent fewer heifers in the first quarter, compared with a year earlier, data showed on April 24, as more animals were being held back for breeding with producers starting an expansion that can take almost three years.

Retail ground-beef prices in the U.S. averaged a record $3.698 a pound in March, government data show, and wholesale beef has surged 15 percent this year, increasing expenses for restaurants including Chipotle Mexican Grill Inc. and Ruth’s Hospitality Group Inc. Pricier meat is helping to boost global food costs, which rose to a 10-month high in March, the latest United Nations data show.

“A tight situation gets even tighter as these heifers are held off the market for breeding purposes,” Dennis Smith, a senior account executive at Archer Financial Services Inc. in Chicago, said in a telephone interview. “Everything gets even tighter when you enter a beef expansionary phase.”

Feeder-cattle futures for August settlement rose by the limit of 3 cents, or 1.6 percent, to close at a record $1.90475 a pound at 1 p.m. on the Chicago Mercantile Exchange, the ninth straight gain and the longest rally since March 1992.

Menu Prices

Consumers may pay as much as 3.5 percent more for beef this year, the fastest inflation for the meat since 2011, USDA data show. Restaurants including Chipotle, the Denver-based burrito chain, are raising menu prices after beef jumped, John Hartung, the chief financial officer, said on a conference call on April 17.

Beef costs climbed 4 percent in the first quarter for Heathrow, Florida-based Ruth’s Hospitality Group, CFO Arne Haak said on a conference call on April 28. The meat may climb 5 percent to 8 percent this quarter, he said. The company runs Ruth’s Chris Steak House chain.

Calves have nine-month gestation periods and take 20 months to 22 months to reach slaughter weight. Feedlot operators typically buy year-old animals that weigh 500 pounds (227 kilograms) to 800 pounds, called feeders. The cattle are fattened on corn for four to five months until they weigh about 1,300 pounds, when they are sold to meatpackers.

Cattle futures for June delivery advanced 1.5 percent to $1.3925 a pound. The price rose for the ninth straight session, the longest rally since Jan. 22.

Feeder cattle have climbed 14 percent this year, and cattle gained 3.4 percent. Hog futures in Chicago have surged 44 percent as a virus that kills piglets spread to at least 29 U.S. states.