Chris Orr: Fun fact about the World Series: One of the players, the Kansas City Royals, are named after the famous livestock show, American Royal. It’s fitting, given that the city continues its rich history as a hub of the cattle business.
And while I don’t expect you to be aware of whether the beef you eat comes from Kansas City, I’m sure you are familiar with the sticker shock at the grocery store, butcher and restaurant. The price of beef has been rising for 10 years, and it has room to go higher, still.
The cattle herd hasn’t been this low in six decades. And while it’s growing, don’t expect a dip in the price of prime rib anytime soon. Beef will remain expensive for some time, but that affords us some opportunities to make money in the commodity today.
How Long Will Beef be This Expensive?
The rise in the price of beef has been significant — climbing 85% since 2009. A number of factors have been at play in order to bring prices where they are now, including El Niño and the drought in California.
Today, the price is about $150 per hundredweight. High whole-beef costs are squeezing restaurant margins, forcing these businesses to serve smaller portions in addition to raising prices, all at the risk of aggravating customers who don’t want to pay more, eat less or both.
This doesn’t just apply to steakhouses, though. Just last week, McDonald’s noted in their investor conference call that beef contributed to a 3% overall increase in the cost of meat and dairy products. The fast-food chain also noted that margin pressure will continue through the end of the year.
Other restaurants that use a lot of beef have watched their profits — and stocks — decline.
Of course, I expect this trend will reverse itself, but not for some time.
Herds are growing, but my sources at stockyards say that ranchers have little intention to bring them to market, in part to maintain the near all-time high price. And with rain returning to both the Central and Southern plains this year, that means there’s plenty of grass for cattle to feed, adding more weight to the animals before they get sent to the market. (That makes sense when you’re a cattleman and paid by the pound.)
Larry Schnell, one of the owners of Stockmen’s Livestock in Dickinson, North Dakota, tells me that ranchers are just starting to sell their herds and that the pace will pick up come mid-November.
However, these animals are not slated to be carved into steak — at least not yet. Rather, ranchers are handing these animals off to other ranchers and to feedlots. The effort now is to continue breeding and feeding until the herd has reached a sustainable level once again.
It will take two more years before this process will have a meaningful impact on beef prices.