Pink slime is no brake to beef price rally

June 12 (Bloomberg) -- The U.S. cattle herd has shrunk to the smallest since three years before Ray Kroc opened his first McDonald’s Corp. hamburger stand, reducing supply and raising prices even as domestic demand sinks to a two-decade low.

Beef output in the U.S., 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 futuresmay 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.”

Smaller Herd

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, Illinois, according to the company’s website. Today, there are about 35,000 restaurants in 119 countries.

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