Beef Prices Headed Higher; Drought had an Impact on Herds

Low cattle supplies in 2012 are expected to drive up beef prices for the second year in a row, stretching consumers still coping with high unemployment and only modest wage increases.

The Agriculture Department reported Friday there were about 91 million head of cattle in the U.S. on Jan. 1, down 2% from a year ago and the lowest level since 1952.

Retail beef prices, now near record levels, will likely rise 4% to 5% this year following a 10% increase in 2011, according to Agriculture. John Nalivka, owner of consulting firm Sterling Marketing, estimates prices could rise as much as another 10% -- more than double the inflation rate for all food.

The most severe drought in more than half a century last year left ranchers in Texas, Oklahoma and other states with meager supplies of grass and water to feed their cattle. Many animals were sold to feedlots or slaughterhouses.

The crisis added to a long-term trend of ranchers thinning their herds because of the soaring price of corn -- a primary feedstock for cattle -- rising property costs and increased competition for land with corn, soybeans and other crops, says Kevin Good, a senior analyst at research firm CattleFax.

At the same time, U.S. beef exports jumped about 22% last year on surging demand from Canada, Japan, South Korea and Hong Kong, Agriculture says. Helping fuel the increase was a falling dollar that made U.S. shipments less expensive for foreign buyers.

The combination of low supplies and strong foreign demand lifted cattle prices despite falling U.S. consumption, Nalivka says. Live cattle prices hit a record $1.26 a pound last week, up 20% the past year.

"It's the best I've seen it," says Danni Beer, a rancher with a few hundred cattle in Lemmon, S.D. Beer says a double-digit increase in profits last year allowed her to replace a tractor, install new water tanks and purchase steel fencing for her corral. She also plans to increase the size of her herd.

Yet neither meat packers nor retailers have been able to pass the entire cost increase to their customers. Nalivka predicts packers will collectively lose $312 million this year. And with unemployment still at 8.5%, consumers may resist further big price increases, he says.

Grocer Supervalu, owner of Albertsons and other chains, says it absorbed part of last year's surge in wholesale costs. "Our goal is to minimize any price increases to our customers," Supervalu spokesman Mike Siemienas says.