Adam Sarhan Barron's Quote: Where’s the Beef?
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Higher Beef Prices Are Likely to Persist
November 14, 2014
By Alexandra Wexler
Bloomberg Commodity Indexes
U.S. cattle futures have posted some of the biggest gains among commodities this year, and the rally looks to be far from over.
The industry is struggling to recover from a severe drought over the past few years that dried out pastures and sent prices for hay and other cattle feed surging. At the time, many ranchers sold animals to offset the higher costs, causing the nation’s cattle herd to plummet to its lowest level in decades.
This year, weather conditions have improved, and grain is less expensive. Ranchers are expanding their herds, but that won’t help in the near term. The reason: They’re holding on to more animals in order to breed.
“The supply cycle is long, and it takes a long time to bring new cattle to the market,” says Adam Sarhan, chief executive at Sarhan Capital, a New York advisory firm. A cow’s gestation period is nine months, with each pregnancy typically resulting in a single calf. Calves don’t usually reach slaughter weight until they are 12 to 22 months old.
“Cattle feeders are expected to raise animals to heavier weights in 2014 and 2015, but this is more than offset by a slower pace of [sales] in the second half of 2015,” the Agriculture Department said in its November supply-and-demand report. In short, there will be fewer, but fatter cattle available, so the supply figures may be a little understated. Eventually higher prices will curtail sales.
Live-cattle futures have jumped 27% this year, boosting the price of steaks, hamburgers, and roasts. On Friday, live cattle for delivery in December ended at $1.702 a pound on the Chicago Mercantile Exchange, down just slightly from the all-time high of $1.705. Sarhan expects live-cattle prices to hit $1.75 a pound by the end of the year. “The path of least resistance remains higher,” he observes.
Bets by speculative investors that live-cattle prices will rise outnumber wagers that prices will fall by nearly 10 to 1, according to the latest data from the Commodity Futures Trading Commission.
SUPPLIES OF SLAUGHTER-READY animals are likely to remain tight into 2015. In its November report, the USDA lowered its forecast for beef production next year by 0.5%, to 23.67 billion pounds, down 3.2% from this year’s total. The agency also raised its projected steer prices to a range of $1.54 to $1.65 a pound, from $1.49 to $1.62 in its October report.
Higher beef costs could eventually stall the rally in cattle futures by curbing demand from consumers. Retail fresh-beef prices surged to a record $5.924 a pound in September, a 20% increase over the level a year earlier, according to the USDA.
Producers of other livestock, such as hogs and chickens, can ramp up production more quickly, which means consumers could opt for those proteins instead of beef.
“In general, recent beef-market action does suggest a slowdown in demand, but if live numbers tighten on [bad] weather, [it] might not matter,” says John Kleist, president of Kleist Ag Consulting, in a note.
Winter storms across the Farm Belt could slow the movement of livestock from farms to feeding and processing facilities. Colder weather can also slow the rate at which cattle put on weight, which would further curb supplies.
ALEXANDRA WEXLER reports on cocoa, coffee, cotton, sugar, orange juice, and other commodities for The Wall Street Journal.