The Skinny (and Fat) on Beef Prices

Chuck Keagle is having a cow over the surging price of beef.

“We have had to raise our prices twice this year,” said Keagle, chairman of the Cask ‘n Cleaver steakhouse chain in Southern California.

An 8-ounce top sirloin steak in one of his restaurants now fetches $16.95, up $2 from last year. That has chased away customers and sliced into revenue. He says his business, Rancho Cucamonga-based C&C; Organization, is losing money for the first time in more than a decade.

Yet what’s tough on Keagle is a blessing for ranchers such as John Orradre, whose family has tended 20,000 acres near San Ardo in Monterey County for more than a century. A year ago, Orradre sold several hundred calves for $644 each. Last month, he finished unloading this year’s calves for about $683 per animal.

“We are all making some money now,” Orradre said.

Beef prices, which climbed to record levels in the second half of 2003, are headed back up again. Indications are they will stay there -- or maybe go even higher -- thanks largely to a steadily shrinking supply of cattle.

The rising prices are contributing to a broad strengthening of the nation’s farm economy. Yet the gains made by farmers -- in many cases after years of depressed prices -- are coming at the expense of consumers. Indeed, high beef prices have become yet another inflationary expense in an economy that has seen other basic commodities such as milk and gasoline hit record levels in recent months.

For the first five months of 2004, the consumer price index rose at a 5.1% seasonally adjusted annual rate, according to the U.S. Bureau of Labor Statistics, compared with an increase of 1.9% for all of 2003. That’s a major reason the Federal Reserve late last month increased its key short-term interest rate for the first time in more than four years.

Beef is taking a particularly big bite out of consumers’ wallets. The average retail price of a 1-pound choice sirloin steak climbed to $6.96 in May, the bureau said, for a 10% gain this year. The price is now within a nickel of the record high reached in November.

The recent surge has largely surprised the beef industry, which expected prices to fall after the discovery in December of a Washington state dairy heifer infected with mad cow disease. Mad cow can be deadly to humans who consume tainted meat, and many countries have blocked imports of U.S. beef out of fear of the illness, sending a flood of meat back into the domestic market.

Prices did fall initially, but not for long, as American consumers largely shrugged off the single mad cow incident.

Wholesale prices for choice rib-eye steak, New York strip steak and even less expensive round steak are at or above their levels of Dec. 23, the day the news of the infected dairy cow was released, according to U.S. Department of Agriculture data.

“The cattle markets are red-hot,” said Ben Higgins, executive vice president of the California Cattlemen’s Assn. The experts “have been confounded at almost every turn.”

America’s infatuation with high-protein diets and summer barbecues is certainly a contributor to higher prices, but contrary to popular perceptions, people aren’t eating more beef. On average, Americans eat 64.9 pounds annually, down from a recent high of 67.9 pounds in 2002, according to Cattle-Fax, a market information company in Denver. That’s down from well above 90 pounds in the mid- 1970s.

Yet Americans are paying more. They spend $68 billion on beef annually, an increase of more than 50% from 15 years ago.

Prices are going up mostly because of the dwindling supply of cattle, a condition many in the industry don’t expect to turn around soon. Since the number of cattle in the United States peaked at 103.5 million in January 1996, the domestic herd has dropped to about 95 million.

Years of drought in the West have parched grazing land, robbing ranchers of the green grass and forage required to increase herds and the beef supply.

“We have been liquidating the U.S. cattle herd,” said Michael Swanson, an agricultural economist with Wells Fargo & Co. in Minneapolis.

Changing demographics also play a role. Older ranchers are taking the current high prices as a “golden parachute” opportunity and “cashing out,” said Gregg Doud, chief economist for the National Cattlemen’s Beef Assn.

In addition, Swanson said, “people are just not as interested in breeding calves. Until recently, it was a lot of work for a little money.”

A May 2003 incident of mad cow disease in Canada cut off the U.S.’ northern neighbor as a source for live cattle and exacerbated the shortage.

All told, according to Doud, the domestic beef slaughter is down about 9% this year. Production for 2004 is expected to total about 25 billion pounds.

All of this is happening at a time when the United States is in the trough of a cattle cycle, in which the size of the nation’s herd waxes and wanes over periods of 10 to 12 years. During the last four decades, the peaks and troughs of these cycles have become successively lower.

The decline in the herd is partly offset by fatter animals. Slaughterhouses get about 30% more usable meat out of a carcass today than they did in 1970, Swanson said.

But the big gains in cattle weight achieved by ranchers have for the most part stalled during the last decade, he added. Swanson notes that after a certain weight, there is a diminishing return from stuffing cattle with more feed. Eventually, the profit from every additional pound of meat is consumed by the cost of the extra feed.

Without new breakthroughs in cattle fattening, any decline in the number of animals at feedlots and ranches more directly affects meat supplies.

Supplies could become even tighter in the months ahead, depending on the course of international diplomacy. U.S. negotiators are trying to get Japan, South Korea and other countries to reopen borders that were closed after the mad cow incident in Washington.

If that happens, and the United States maintains its own ban on importing live cattle from Canada, consumers here would see a beef crunch tighter than what helped spark a nationwide meat boycott by the public in the early 1970s.

“Expect cattle and beef prices to move to an entirely new range of historic highs,” Swanson said.

That’s the last thing restaurateur Keagle wants to hear. Higher prices have already cut his number of dinner guests by 5%, he said.

“It’s tough. Beef is my biggest raw-material cost,” said Keagle, who sells 7,000 servings of prime rib and steak a week at his nine restaurants.

Keagle figures he pays $19.04 to put a 14-ounce prime-grade New York steak on a plate at his upscale Sycamore Inn in Rancho Cucamonga. And that’s before he pays for the chef to cook the portion, for the waiter to serve it and for anyone to clean up afterward. His customers shell out $36 for the meal, up from $29 last year.

“But I would have to charge $40 for it if I were to keep my normal profit margin,” Keagle said.

It’s unlikely that he will get any relief soon.

That’s good news for rancher Orradre, who has used his added revenue to purchase a pickup truck, fix some fencing and make other improvements to his ranch.

“Hopefully this lasts for a while,” he said.