In early January, I shared with you my concern about rising beef prices. Well, during the last several weeks, other observers have begun to express the same concern. I’ve seen countless articles echoing what I shared with you. It’s no wonder, since the U.S. Department of Agriculture reported the average retail price per pound for fresh beef in January was $5.04, the highest price ever on records that date back to 1987.
Time magazine ran the story “Beef: It’s What’s No Longer Affordable for Dinner” earlier this month, in which it pointed out that at the start of 2014, U.S. ranchers had 87.99 million head of cattle, the lowest total since 1951. The cause? Long periods of drought in California and Texas. The same piece went on to point out, just as I indicated to you in January, that rising beef prices will be hitting both you and restaurants during the next few years.
That situation tells me that before too long, we’ll either be seeing a round of price increases at companies like McDonald’s (MCD), Ruth’s Hospitality (RUTH), Red Robin Gourmet Burgers (RRGB), Del Frisco’s (DFRG) and others, or their profits and earnings will be hit. Of course, higher prices are likely to hit the revenue line. Either way, it’s not a good time for beef-heavy restaurant companies.
Add in another wrinkle -- rising overseas demand for U.S. beef as emerging-market diets shift from rice and grain to protein-based food. "The growth of the middle class in developing countries probably has more to do with the increase in demand and related prices than anything else," said Jeff Sindelar, an associate professor who studies the meat industry at the University of Wisconsin-Madison. That shift is adding more pressure on top of shrinking herds.
Unfortunately, this reality is one of those instances where the cure -- in the form of a larger supply of cows -- is certain to create even more pain for consumers, at least in the short term. That’s because herd growth only happens when producers set aside more calves for breeding instead of selling them for slaughter. Essentially, the beef supply has to get smaller before it can get bigger.
Analysts expect that it will be several years before America’s cattle herds increase substantially in size. Until then, we should get used to the idea that beef prices will keep soaring, perhaps at a rate of 7-8% per year.
Chris Versace is the editor of PowerTrend Brief — a FREE, weekly electronic newsletter. He also writes PowerTrend Profits, a paid monthly newsletter that helps individual investors profit through buying shares of companies poised to win big in the 8 PowerTrends, as well as writes the PowerTrader trading service that seeks to deliver short-term gains using stocks, ETFs and options. Chris has been ranked an All Star Analyst by Zacks Investment Research.