The Retired Investor: Rising Beef Prices This Summer May Chill Your Grill

The American tradition of firing up the backyard grill for a BBQ among friends and family is upon us. However, this year's record high prices for beef, brought on by generational lows in cattle inventories, make serving up steaks and hamburgers a budget-busting event.

 

A look at cattle futures on the Chicago Mercantile Exchange (CME) reveals what we can expect in terms of price increases this summer. Over the last month, live cattle futures have hit a record high of $2.18 a pound. That is a record high. Prices are up 22 percent from the same time last year. In comparison, pork prices are forecasted to rise by 1.8 percent, while poultry prices are expected to increase by a mere 1 percent

 

Grilling season officially began on Memorial Day and runs through to Labor Day. For whatever reason, the lion's share of grilling is packed into the days between Memorial Day and the Fourth of July. Your local supermarket or grocery store has already stocked its meat counters by buying steak, ribs, ground beef, and other meat selections from wholesalers to lock in supply.

 

But before you blame food companies for gouging, consider that companies such as Tyson Foods have reported a second-quarter loss of $285 million in its meat division, where a $470 million cost increase hit them in their beef-packing operations. What, therefore, is the core problem in the sky-rocketing price of meat?

 

I have said it before, and I will say it again — climate change. The U.S. Department of Agriculture reported that the total cattle herd in the U.S. is 86.7 million head. That is a generational low dating back to 1951. The changing weather has caused drought conditions in grazing and farming lands throughout the nation. That not only limits ranchers' ability to add more animals to the herd but has also increased the cost of feeding them, as feed prices have also risen.

 

That's tough going for the average hard-working rancher, who is now in his sixties. Drought, rising feed prices, water scarcity, the threat of tariffs, and increasing prices for everything from diesel to tools and tractors leave little room for profit.  Many are retiring, and few are taking their places. The cost of starting a farm or ranch requires enormous capital, and few are willing to risk it in this environment.

 

Producers are taking steps to reduce costs, including raising heavier animals, closing inefficient meat-packing facilities, and encouraging growers to replenish their herds. If, by some miracle, this were to occur, it would still require 18-24 months for the calf to grow into a harvestable animal. In the meantime, the trend is not your friend. Unfortunately, since most of the world has given up on addressing climate change, the only real solution to rising meat prices is to accept higher prices.

 

At some point, that steak or hamburger will cost so much that it could cause a massive shift in consumer preferences. When that occurs, is anyone's guess. As for your next BBQ, you have three choices: take out a loan, switch to chicken, pork, or fish, or pray for rain.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.