By Tom Polansek
CHICAGO (Reuters) – U.S. consumers grappling with soaring inflation face more pain from high beef prices as ranchers are reducing their cattle herds due to drought and lofty feed costs, a decision that will tighten livestock supplies for years, economists said.
The decline in cattle numbers, combined with stiff costs for other production expenses, illustrate why a recent fall in grain prices to levels not seen since Russia’s invasion of major corn and wheat exporter Ukraine may not immediately translate into lower food prices at the grocery store.
Feed is the largest cost component of raising a cow for beef, so lower grain prices often help to reduce meat prices. But meat companies like Tyson Foods Inc, which reported weaker-than-expected earnings on Monday, must pay top dollar for animals when there are fewer to slaughter. Processors are also paying more for labor, fuel and other items.
“There’s really a lot of distance between the price of those grains and the price of those products at the meat counter,” said Bernt Nelson, economist at the American Farm Bureau Federation.
Corn futures prices have dropped 26% since hitting a 10-year high in April after the Ukraine war sparked worries about global supplies. Prices are still up 9% from a year ago at about $6 per bushel.
The lower prices benefit livestock producers, though U.S. government data shows ranchers on July 1 had already reduced the nation’s cattle herd by about 2% from a year earlier to its lowest level for that date in about seven years.
Producers will likely liquidate even more cattle due to drought, said Shane Miller, Tyson Foods’ president of fresh meats, on a conference call following the quarterly results. Chief Executive Donnie King projected prices for cattle and beef will rise moving into 2023 and 2024.
Ground beef prices have already jumped 10% from last year, U.S. government data shows. Rising cattle costs eat in to meatpackers’ profit from high beef prices.
Tyson reported its beef unit’s adjusted operating margins dropped to 10.2% in the April to June quarter from 12.7% the previous quarter and 22.6% a year earlier, while live cattle costs increased about $480 million. Margins will decline further to 5% to 7%, the company said.
Margins and meat supplies get a temporary boost as ranchers send more animals to slaughter, instead of keeping them to reproduce, analysts said. But consumers will ultimately be left with less beef, and it takes nearly two years to raise a cow once the liquidation stops, economists said.
“The prices are here to stay for a while,” said Glenn Brunkow, a farmer who raises cattle and sheep in Wamego, Kansas.
Brunkow, a member of the Kansas Farm Bureau’s board of directors, said high diesel fuel and feed prices continue to drive up his production costs. He recently paid about $475 per ton for sheep feed made with corn and other ingredients, up 40% from a year ago.
Some consumers are switching to chicken or cheaper types of beef to reduce their food costs, meatpacking executives said. Still, Tyson said beef demand remains strong and reported sales volumes rose 1.3% in the last quarter as prices slipped.
“Even though we may be seeing some relief in feed prices, that demand is going to hold (beef) prices where they’re at,” Iowa State University economist Lee Schulz said.
Other protein options have also become pricier. Tyson said its chicken prices soared 20.1% in the last quarter from a year earlier. Wholesale prices for white eggs, meanwhile, reached a record high of $3.40 a dozen on July 21 due to strong retail demand and avian flu outbreaks that killed egg-laying chickens, data firm Urner Barry said.
In Eugene, Oregon, accounting student and mother Blair Hickok, 40, said her monthly grocery bill spiked 40% to more than $1,200 due to climbing prices for beef, chicken, eggs and products like Johnsonville bratwursts. Her family stopped eating out to save money.
“We cannot sustain this for very long,” said Hickok.
(Reporting by Tom Polansek in Chicago; Editing by Caroline Stauffer and Matthew Lewis)