Beef price surges following harsh US winter

By Gregory Meyer and Greg Farrell in New York

Beef prices are soaring after cattle failed to fatten up during the harsh US winter and cash-strapped ranchers culled herds to cope with the recession.

Cattle futures have risen more than 20 per cent since December and are again flirting with $1 a pound, a milestone previously reached during the commodity price rise of 2008.

Worldwide, beef and veal production is heading for a third straight year of decline, according to the US Department of Agriculture. For several years cattle raisers have been reducing the size of their herds as bovine spongiform encephalopathy, or mad-cow disease, hurt trade volumes; a US drought and record corn feed prices pinched profits; and the recession cut demand.

Then came the hard US winter, as cattle struggling to keep warm failed to gain weight at the usual pace, resulting in thinner cows shipped to slaughterhouses.

“It may be the biggest rally in fed cattle prices from December till April in the last 30 years,” said James Herring, president of Friona Industries, a Texas feedlot operator that supplies Cargill, the US agribusiness group.

CME cattle futures on Tuesday were 98 cents a pound, almost 25 per cent higher than lows late last year. Hog futures have also gained after pork producers slashed supply.

Rising beef prices are likely to translate into higher prices for goods such as McDonald’s hamburgers and filet mignons at Morton’s, the US steakhouse chain, according to restaurant analysts.

“The underlying cost is the driver to eventual price increases,” said Matthew DiFrisco, executive director of equity research at Oppenheimer & Co.

Oppenheimer estimates that ground beef accounts for 10 per cent or higher of McDonald’s costs of goods sold. Although the chain’s basket of costs is expected to remain flat for much of 2010, within that basket the price of beef and dairy products are expected to rise.

Steakhouse chains, from Texas Roadhouse in the middle market to Morton’s at the high end, have a higher exposure to beef costs – as much as 40 per cent, said Mr DiFrisco.

Rising beef prices would affect menu offerings at casual dining chains, said Scott Hume, who publishes a daily newsletter, Burger Business. “What restaurants decide that we love is correlated to what it costs them.”