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Where's the Beef? Profiting From the Worst Drought in the US Since 1956

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Stock up on steaks as well as fertilizer and seed stocks.

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MINYANVILLE MEDIA Reading Alex Brokaw's informative look at the complex situation caused by the recent drought (see Fewer Crops Mixed With Ethanol Policy Makes for Volatile Food Prices), I was struck by the mention that some Chicago futures prices were down. Indeed, both futures and spot prices for some commodities are down, for now.

One commodity that is down but almost guaranteed to soar is beef.

Cattle spend 12-18 months grazing on grass before they head to the feedlots where they are fattened on corn for five months. The drought means there's little or no grass for eating in the first stage and feedlots are losing money on fattening cattle on the second stage as as their corn prices have doubled.

The University of Missouri data is more conservative with their numbers showing corn prices having risen 64% since June. For the latest from the University of Missouri, see their Cattle Outlook.

This obviously untenable situation is leading farmers to sell calves two to three months earlier than normal and halting any herd expansions. So far cattle herds in the US, the world's largest beef producer, have shrunk to the smallest since 1973, according to USDA data. The domestic herd including ranches, feedlots, and dairies was pegged at 97.8 million heads on July 1.

In the first half of the year, about 3.09 million cows were culled (read: slaughtered) compared with a 10-year average of 2.8 million, according to the USDA. The pace at which the culling is going has increased dramatically since June, the USDA noted on August 16, although it did not give its estimate for how much faster the process is happening.

According to Livestock Marketing Information Weekly: "Lower feeder calf prices also probably reflect some supply-side pressure in the market from drought-induced selling and some additional demand weakness from a lack of alternative places to go with calves because of a lack of forage."

In supply/demand terms, the sudden "supply" of beef is actually driving prices down. In July prices had already fallen more than 20%.

From another issue of Livestock Marketing Information Weekly: "On a monthly average basis the 500-to 600-pound steer calf price in the Southern Plains crumbled from about $182.00 per cwt [editor's note: cwt is the abbreviation of hundred weight, think per 100 pounds] in May to about $145.50 in July."

By 2013 today's "supplies" of beef will be gone and as of now there are no ways to speed up the natural process of growing a cow. A calf takes nine months to gestate and 20 more months to fatten, so herds take more than two years to expand and come to market. Given the slow start-up time, beef output will drop 3.9% to 24.575 billion pounds, a nine-year low in 2013, according to the US Department of Agriculture. The slide in output may extend through 2017, according to the USDA.

In short, this means stock up on steaks now because they are going to cost a lot more for the next two or more years. How much more is not certain.

The USDA estimated on July 25 that the domestic price of beef will rise as much as 5% next year, more than any other food group. The University of Missouri predicts an 8% increase. Other sources are predicting a 12.5% rise in beef before next summer.

Part of the pricing issue is that not all beef is the same. There are feeder steers, slaughter cows, bulls, calves, yearlings, pee-wee calves, featherweight calves, just weaned calves, and so on. For the latest pricing data for the various shades of bovine, see the National Feeder & Stocker Cattle Summary.

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