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Young-Cattle Futures Surge in Sign of Higher Beef Prices Ahead

Consumers Are Already Feeling the Impact

By
Kelsey Gee

June 8, 2014 6:54 p.m. ET

U.S. prices for young beef cattle are soaring, a sign consumers may not see relief from high meat prices for years to come.

The record-setting market for “feeder” cattle, as the young steers and heifers are known, reflects dwindling supplies after years of drought in the southern Great Plains. The shortfall is being exacerbated by recent moves by ranchers to rebuild herds, which temporarily limit the number of animals entering the supply chain.

The lofty feeder prices are rippling across the beef industry, contributing to record retail prices for the red meat. Feeder cattle are lightweight animals sold to feedlots, which fatten them for slaughter and typically sell them to meatpackers when they are 12 to 22 months old.

Feeder-cattle futures have jumped 20% this year, among the best-performing commodity markets. On Friday, prices for August delivery, the front-month contract, rose 0.4%, to an all-time closing high of $2.0052 a pound at the Chicago Mercantile Exchange. CME +1.45%

“I’ve never seen prices like this before in my life, or ever dreamed that I would,” said Rob Fisher, the 64-year-old president of Oklahoma National Stockyards Co., which runs cattle auctions in Oklahoma City.

Consumers already are feeling the impact of higher cattle prices. Average retail fresh beef prices climbed to a record $5.496 a pound in April, up 13% from a year earlier, according to the U.S. Department of Agriculture. The recent gains in feeder-cattle prices are likely to translate into higher prices for hamburgers and steaks in the years ahead as feedlots, meatpackers and retailers pass along the increased costs.

Rebuilding the nation’s cattle herd can be a slow process, as a cow’s nine-month gestation period normally produces just one calf a year. That calf is typically kept on the farm to graze pasture grasses by its mother’s side for at least an additional eight months before entering feedyards.

The USDA last month projected that retail beef prices will rise as much as 6.5% this year, compared with 2% last year.

The $4.4 billion feeder-cattle futures market has rallied as recent rains in Texas, Nebraska and several other big cattle states have tempered drought conditions, providing more grass and water to nourish livestock. This has led some ranchers who had culled herds in recent years due to high feed costs to hold on to more cattle, including females they can use to breed more animals. The record prices for young cattle also have encouraged ranchers to invest in more cows to expand herds.

Although in the longer term, the held-back breeding cattle will add to the number available to processors, the rebuilding efforts are shrinking the number of animals currently bound for feedlots, forcing feedlot operators to raise prices to secure supplies. Last month, the number of cattle on U.S. feedlots fell 1% from a year earlier to 10.6 million, the 21st consecutive month of year-over-year declines, according to the USDA.

Feedlots also have been more willing to raise prices because their other big cost, corn used in feed, has tumbled about 30% in the past 12 months thanks to a record U.S. crop harvested last fall. As the price of the major feed input has dropped, operators have had more cash to bid for the tight supply of cattle in order to grow animals while running at or near full capacity.

Feedlots themselves have fetched record prices for slaughter-ready cattle this year from meatpackers such as Tyson Foods Inc. and Cargill Inc.

To be sure, some livestock traders warn that the rally could collapse if U.S. consumer demand for beef slows, creating pressure across the cattle industry. Prices for live, slaughter-ready cattle have fallen about 8% from a record $1.5195 a pound on the CME in February. If live-cattle prices fall significantly in the months ahead, margins for feed-yard operators could be squeezed.

“When you’re at the top end of a price range, you face the risk of the economy heading south or demand drying up,” said Don Roose, president of futures brokerage U.S. Commodities Inc. in West Des Moines, Iowa. “All good things come to an end.”

Still, analysts said it could take several years before the nation’s total cattle supply, which contracted 2% last year to a six-decade low, begins to rise again. And that will depend in part on continued improvement in pasture conditions, they said.

About 68% of Texas, the largest U.S. cattle-producing state, was suffering from drought as of June 3, down from 87% a year ago, according to the National Drought Mitigation Center.

Chloe Nunley, who helps manage her family’s cow-calf business in Sabinal, Texas, is among ranchers who have benefited from recent rainfall and higher feeder-cattle prices. Revenue at the ranch, which typically breeds about 2,500 beef cattle a year, has climbed about 18% this year, the 25-year-old Ms. Nunley said. “It’s been unreal.”

Improved pastures also have led to increased demand for the ranch’s female calves among other Texas ranchers, which have bought some to rebuild their own herds, Ms. Nunley said.

Some feed-yard managers said they have felt emboldened to take more risk recently because of the drop in grain prices and historically high prices for fattened cattle. Corn futures slipped to a three-month low last week amid speculation this year’s crop could be as large as last year’s.

“Nobody’s excited to go out and pay record prices for feeders,” said Blake Albers, whose family runs a feed yard with 20,000 cattle in Wisner, Neb. But “because the first two quarters of the year were excellent, our thinking is, ‘Let’s just go out there, feed cattle and see what happens.’ “