031048 Beef Group, Restaurants Deal with High Beef Prices

Steakhouses and fast-food franchises trying to corral record-high beef costs may take solace in the view by the National Cattlemen's Beef Association that tight supplies will be short-lived and that consumers' "love affair" with beef will continue.

Last week, live cattle sold from $105 to $120 per hundredweight, compared with about $66 a year ago. As of Oct. 16, the USDA reported lightweight choice-grade beef at a record $201.18 per hundredweight, up almost 82% from a year ago.

Independent meat-market analyst Bob Brown said that estimated steer and heifer beef production for the latest two weeks combined was nearly 17% below a year ago. This created a "supply shock" that has caused the huge jump in beef carcass prices from a year ago, he said. September's average for 50% and 90% lean beef trimmings, a major bellwether for ground beef prices, was up dramatically, said Brown.

Travis Benson, livestock futures market analyst and broker with Crystal River Capital, said several market factors converged to produce the unusual price circumstance for the beef industry. Over the summer, beef experienced "phenomenal" demand in the midst of a U.S. ban on Canadian cattle and beef. The U.S. ban was implemented because of a case of mad-cow disease in Canada.

What's more, in recent years drought conditions in major cattle-producing states withered supplies and affected feedlots' ability to replenish with fresh cattle, said Benson. And limited supplies contributed to feedlots selling cattle early, hindering the animal's ability to grade choice, thus reducing choice beef output, a staple of high-end steakhouses, Benson said. Mid-level restaurants tend to use more select cuts.

William Hyde, Ruth Chris Steakhouse chief executive, said the cost of beef alone was up 28% from a year ago, which forced the restaurant chain to increase its menu prices by 1% to effectively manage margins. Over the last eight months, and during all of 2003, the company has been trying to increase exposure of other menu items, said Hyde.

Crystal River Capital's Benson said the food-service industry is going through the initial shock of higher beef prices and making decisions about what to do. The next three months will be critical if beef prices remain high, he said. Weather could still be a determining factor during the winter, a time of strong demand for beef, he added.

According to a Dow Jones Newswire article, in anticipation of that possibility, this week fast-food franchises such as McDonald's are considering menu price increases, in part to offset anticipated higher beef costs. McDonald's said it believes beef, which could cost as much as 5% more by this December than a year ago, will rise another 4% to 6% in 2004. This, they said, is in part because of the ban on imports from Canada that continues with no end in sight.

Michele Peterson, a National Cattlemen's Beef Association spokeswoman, said the group has fielded calls from restaurants regarding high beef prices, from those wanting suggestions about menu changes and whether they should wait to see what direction beef prices will take.

Peterson said the "good news" from a private market advisory service suggests live cattle prices peaking then withdrawing slowly to the low to mid $90s rather than high $90s. What's more, cattle supplies tend to undergo a cyclical increase this time of year, she said.

NCBA believes the tight beef supply situation is short-term for the restaurant industry, said Peterson. Plus, studies have shown that beef is a leader in restaurant servings and is a food that consumers have a difficult time giving up, she added.

Source: OsterDowJones Commodity News

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