Shivering cattle signal higher McDonald’s beef cost

As temperatures dipped to a record minus 25 degrees Fahrenheit (minus 32 Celsius), the crew at Dean Wang’s ranch in Baker, Montana, increased alfalfa-hay rations to give his cattle more energy during the arctic blast.

“Cattle are requiring more feed in order to just maintain their body temperature, instead of putting that extra energy into gaining weight,” said Wang, 46, who has about 850 cows that will calve this spring and 550 young cattle. “This year, everyone started feeding a little earlier than what they would have liked, because of the heavy snow and the cold.”

The deep freeze that swept across the U.S. last week, disrupting travel and boosting fuel use, is compounding stress on a shrinking domestic beef industry already struggling with high costs and weather shocks. While crops from oranges to winter wheat avoided major damage, the cold slowed the growth of livestock and extended a rally in Chicago cattle futures (CME:LCH14) to a record, signaling higher beef costs for restaurants including McDonald’s Corp. and Texas Roadhouse Inc.

The U.S. cattle herd contracted for six straight years to the smallest since 1952, government data show. A record drought in 2011 destroyed pastures in Texas, the top producing state, followed the next year by a surge in feed-grain prices during the worst Midwest dry spell since the 1930s. Fewer cattle will mean production in the $85 billion beef industry drops to a 20-year low in 2014, the U.S. Department of Agriculture said.

Herd Size

“You sell your cattle because you can’t afford to feed” them, said Paul Looney, a Mineral, Texas-based rancher who serves as the first vice-president for the state’s Independent Cattlemen’s Association. “We were hit across the board in Texas. Everyone had to reduce herd size, so that impacts the whole beef business, from the ranch to the plate.”

Cattle futures rallied 12% since the end of June and reached $1.377 a pound on Jan. 9, the highest since trading began on the Chicago Mercantile Exchange in 1964. The Standard & Poor’s GSCI gauge of 24 raw materials climbed 0.7% in the period, and the MSCI All-Country World Index of equities rose 13%. The Bloomberg Treasury Bond Index was little changed.

Prices that settled at $1.37075 yesterday may reach $1.405 in 2014, according to the median of six analyst estimates compiled by Bloomberg. Futures climbed for five straight years through 2013, the longest streak on record.

Commercial beef output in the U.S., the biggest producer, may drop 5.4% this year to 24.32 billion pounds (11.03 million metric tons), the lowest since 1994, the USDA said Jan. 10. The herd reached a 61-year low of 89.3 million head as of Jan. 1, 2013. The agency will update its estimate on Jan. 31.

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