September 26, 2003

 

 

US Beef Makes A Comeback

 

Surging consumer demand and a ban on Canadian livestock are fuelling a bull market for U.S. cattle that is improving business in ranching towns, fattening meatpacker profits and creating headaches for restaurateurs trying to shield diners from higher prices.

 

Cattle prices have hit records this month, and the momentum is such that they will probably stay lofty enough to keep ranchers profitable for a couple of years. In Iowa, meatpackers last week paid a record 90.72 cents a pound for fattened steers, up 38% from what they paid a year earlier, causing an economist to remark that this was probably the best time for ranchers in 40 years.

 

The boom is a huge lift for the U.S. farm economy, which is recovering from a five-year recession. Ranching is agriculture's largest sector, generating about $41 billion this year, or 20% of the farm economy's total revenue. And the beef rally is a big reason for a forecast rise in this year's farm income. The Agriculture Department now expects net farm income to climb 49% in 2003 to $52.6 billion, which would be the highest level since 1996.

 

The cattle boom will hit home for ranchers in the next several weeks, when most calves are weaned and sold to the businesses that will fatten them on grain. For many producers, selling cattle will never have been so profitable. And this profitability of ranching is increasing the value of grazing land, which is in turn increasing both the asset value and credit-worthiness of ranchers in the region.

 

According to the Kansas City Fed, the average price of ranch land in the region on June 30 was 6% higher than a year earlier. "Higher cattle prices are underpinning a recovery of the farm economy in our district," said Jason Henderson, an economist at the Kansas City Fed's Center for the Study of Rural America. Higher cattle prices are going to help reduce farming debts. 

 

The cattle industry is prone to boom-and-bust cycles, but this price rally is extraordinary for its strength. A number of factors have led to unusually tight beef supplies. The U.S. cattle population, which stood at 96.1 million on Jan. 1, has shrunk 7% since 1996.

 

At first, low cattle prices forced ranchers to reduce their herds. Then a stubborn drought began its spread across the Plains states, shrinking the ability of the grasslands to support cattle. Beef supplies tightened even more when Washington closed the border in May to imports of Canadian cattle and beef after the remains of a single Alberta cow tested positive for mad cow disease.

 

Last year, 8% of the beef consumed in the U.S. originated in Canada. While the U.S. government is beginning to allow imports of some types of Canadian beef, it isn't clear when normal trade will resume. People who eat tainted beef products can catch the human form of the fatal brain-wasting disease.

 

So the per-capita beef supply in the U.S. will probably drop three pounds this year to about 65 pounds. And thanks to the long reproductive cycle of cows, it will probably take two years before U.S. ranchers can expand their herds significantly. Also helping the rally: America's appetite for beef is growing. Food-industry executives credit everything from the popularity of diet fads to an improving economy, which is apparently encouraging consumers to treat themselves to steak.

 

High cattle prices are usually bad for meatpackers, because raw-materials costs rise. But strong consumer demand is allowing them to pass along higher costs to customers. Also aiding their bottom lines: Major beef importing nations such as Japan and South Korea are switching their business to U.S. meatpackers and away from Canada.

 

Tyson Foods Inc., the nation's biggest meat company, earlier this week raised Wall Street's outlook for the company's fourth quarter ending tomorrow, primarily because its beef unit is doing better than expected. "The true beef eaters aren't looking at price as much," said John Tyson, the company's chief executive and chairman.

But the steakhouses are. Wholesale prices of some prime cuts have jumped 40% in the past few months. Beef costs are fluctuating so much that some restaurants have stopped printing menu prices for their most expensive cuts. At Jordans in Washington, the price for the 32-ounce prime, dry-aged Porterhouse steak is listed as "A.Q." As quoted.

 

Despite the strong consumer demand for beef, competition is so fierce nowadays that many restaurants are absorbing much of their higher costs rather than sock customers with sticker shock, as raising prices does not seem like a great strategy.

 

Economists expect retail beef prices to climb about 7% this year, compared with an overall food inflation rate this year between 1.5% and 2%. But many restaurant executives say they can't afford to hold back from raising prices much longer. "In 2004, everyone will have to pass along higher costs," said John Bettin, president of Morton's of Chicago Inc.