I am a carnivore but buy beef only once a year. My beef comes directly from a ranch after a brief stop at a small, nearby packing plant, and I usually buy half a cow. Last September, I paid just under $5 a pound for both steaks and hamburger. But in February, USDA choice grade beef hit a record $5.28 a pound.[inlinetweet prefix=”” tweeter=”@SovereignInvest” suffix=”#Commodities”]The price of beef has been rising ever since the Great Plains drought forced ranchers to reduce their herds. [/inlinetweet]The price went up even more this winter because cattlemen did not want to transport livestock to market during the coldest part of the winter.
The combination of the recent drought, the harsh winter, and El Niño is going to make life very complicated for ranchers during the short term. Let’s dissect the situation and see where we can come out ahead.
The largest cost for cattle producers is food, which, on the Great Plains, is usually grass. Once cattle go to the feedlot on their way to the packing plant, food is in the form of grain. Drought dried up the grass and fields of grain.
The supply of U.S. beef has been shrinking for the past seven years because of the Great Plains drought. Drought made feed too expensive and ranchers sold cattle so their herds would be more profitable. The U.S. herd has fallen from 30 million to 29 million head in the last three years, hitting the lowest level in 60 years.
The first weather shock to the industry was the Great Plains and California drought that made it too expensive for ranchers to feed their animals. Hay gets expensive during drought. In some cases, there just wasn’t enough food for them to eat and, rather than let them die, they were sold to slaughterhouses.
The same weather shock also ravaged the corn crop, and the price shot up to $7 a bushel. Feedlots couldn’t finish the cattle and make a profit. So they reduced their herds.
The second weather shock was the polar vortex, which kept cattle producers from taking their animals to market for fear the animals would lose weight on the way. Cattle are priced by the pound, and when you get paid by the pound, the goal is to keep the animals as heavy as possible. Lost weight is lost money.
El Niño Brings More Trouble to the Great Plains
El Niño will bring much needed rain to the southern and central Great Plains, turning pastures green, which in turn will encourage ranchers to increase the size of their herds. That’s all fine and dandy, but it takes three years for a calf to be market weight. Even if the herd starts building this year, it won’t have a meaningful impact on your next trip to the grocery store until 2017. While the price of cattle feed will move lower, the price of beef will remain high for up to another three years.
What’s going to happen between now and 2017?
Beef prices will continue to increase as demand remains high and, especially if the price of corn goes up due to additional weather shocks.
The cool, wet spring has slowed fieldwork across much of the Corn Belt and the crop will be planted later than normal in many areas from Nebraska and Missouri to Pennsylvania. The eastern half of the Corn Belt has a significant chance of experiencing a late-season freeze, which will kill new plants. There is also a risk for an unusually early-season freeze in late August or September.
When the price of corn goes up it becomes much more expensive to feed cattle and feedlots will send their animals to the packing plant early.
The price of beef will come down gradually during the next three years as Great Plains and California ranchers put more cattle on pastures greened up by El Niño’s rain.
In the meantime, there is an exchange-traded note (ETN) that allows you to track livestock futures contracts. It’s the Dow Jones–UBS Livestock Subindex Total Return ETN (NYSEARCA: COW). It has 60% exposure to live cattle and 40% to lean hogs. The ETN has gained 11% in the last three months. However, you’ll want to exit COW this summer as hog prices start to decline.
There’s a silver lining in every cloud,
Editor, Weather Trader
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