Pink slime no brake to beef price rally

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CHICAGO — The U.S. cattle herd has shrunk to the smallest since three years before Ray Kroc opened his first McDonald’s hamburger stand, reducing supply and raising prices even as domestic demand sinks to a two-decade low.

Beef output in the United States, the biggest producer, will drop for a third year in 2013 after drought destroyed pastures, forcing farmers to cull herds to the smallest since 1952, government data show. Cattle futures traded in Chicago may rise to a record $1.33 a pound by year-end, according to Ron Plain, a livestock economist at the University of Missouri at Columbia who has advised the U.S. Department of Agriculture.

Rising prices are shoring up income for farmers contending with consumer concern over a type of treated meat dubbed “pink slime” and a case of mad cow disease in April. While U.S. beef consumption is contracting for a sixth year, exports last year were the highest ever. Global retail-meat costs gained 4.8 percent since February 2011 even as an overall food gauge tumbled 14 percent from a record, United Nations data show.

“The U.S. beef-cattle herd is at its lowest level in 50 or 60 years at the same time that global consumption of increased protein content and quality foods is rising,” said Steve Shafer, the chief investment officer at Covenant Global Investors, an Oklahoma City-based hedge fund that manages $320 million of assets. “Over the next three to five years, the supply-and-demand dynamics are tighter supplies with growing demand, which equals higher prices.”

Cattle futures on the Chicago Mercantile Exchange rose 16 percent in the past year, second only to feeder cattle among 24 commodities tracked by the Standard & Poor’s GSCI Spot gauge, which plunged 17 percent. Feeder cattle are animals being fattened prior to slaughter. The MSCI All-Country World Index of equities slid 9.7 percent in the past 12 months. Treasuries have returned 8.5 percent, a Bank of America Corp. index shows.

Record beef prices predicted for this year by the Livestock Marketing Information Center, a 57-year-old research group based in Denver, may mean higher costs for retailers and restaurants.

Beef and dairy farmers held 90.77 million head of cattle on Jan. 1, 2.1 percent less than a year earlier, the USDA estimates. That was the lowest since 1952, three years before Kroc opened his first McDonald’s restaurant in Des Plaines, Ill.

Smaller breeding herds mean that calf production in the U.S. has declined for 16 straight years to the lowest since 1950, the University of Missouri’s Plain said. That could mean the highest prices ever, said Plain, who has studied the industry for three decades.

Plain’s forecast of $1.33 is for February futures on the CME. The previous all-time high for a most-active contract is $1.315, reached on Feb. 22. Cattle for August delivery, currently the most active contract, traded today at $1.20775.

Beef output will fall 2.5 percent to 24.661 billion pounds (11.19 million metric tons) next year, the lowest since 1993, the USDA said in a May report. The department will update its forecast at 8:30 a.m. in Washington.

Shrinking supply may not be enough to keep prices rising because the outlook for demand is “pretty ominous,” said David Kruse, the president of CommStock Investments Inc., a broker in Royal, Iowa, who has studied the markets since the 1970s. Slowing growth from Europe to China and concern that the U.S. economy may falter will hurt the cattle market, he said.

JPMorgan Chase in New York lowered its forecast for third-quarter economic growth in the U.S. to 2 percent from 3 percent after the government said June 1 that employers in May added the fewest workers in a year. Expansion in China will slow to 7.9 percent in the second quarter from 8.1 percent in the first quarter, according to the median of 21 economist estimates compiled by Bloomberg.

U.S. beef consumption is forecast by the USDA at 11.359 million tons, the lowest since 1993, partly as people eat more pork. Wholesale-beef prices reached an eight-month low in April. Consumers curbed purchases and some retailers stopped selling products containing lean, finely textured beef dubbed “pink slime” by food activists because it was made from beef trimmings and treated with ammonia hydroxide to kill pathogens.

Cattle futures plunged by the exchange limit on April 24, when the U.S. reported its first case of mad cow disease since 2006. Prices have since rebounded 8.2 percent on signs that the case was isolated and importers didn’t halt purchases like they did in 2003, when the first case of bovine spongiform encephalopathy, or BSE, was found in a Washington state cow. The following year, U.S. beef exports plunged 82 percent.

Last year was the first time that U.S. beef exports exceeded those of 2003, and the most recent case of BSE was a “non-issue” for the market, said Chris Hurt, an agricultural economist at Purdue University in West Lafayette, Ind., who has been studying the livestock markets for about 40 years.

Cattle producers are still recovering from last year’s drought in the Great Plains, which destroyed pastures and caused $7.62 billion in farm losses in Texas, the biggest U.S. cattle producer, state data show.

Profit is rising for those ranchers who have cattle left to sell to feedlots, and returns over cash costs may reach an all- time high of $230 per cow in 2012, according to estimates from the Livestock Marketing Information Center.

“We’re enjoying these record prices,” said Richard Thorpe, 54, who runs a cow-calf business in Winters, Texas, and reduced his herd by 70 percent last year because of drought. “We just need Mother Nature to cooperate so that we can get out of this rough time period and get back in the business of raising cattle.”

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