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December 31, 2013

Fewer cattle, higher prices

Parsons, Kansas — Beef packers paid $133 to $136 for slaughter cattle, surpassing the previous record of $132 set in late October, according to USDA.

Cattle futures also climbed to a record as U.S. beef production is forecast to drop to an 11-year low in 2014 while the improving economy signals increasing meat demand.

U.S. beef production is expected to decline 5.7 percent  to 24.205 billion pounds in 2014, the lowest since 1993, predicts the Department of Agriculture. U.S. cattle feeders added 3.1 percent fewer cattle last month than a year earlier, reducing the total inventory to the second-lowest for Dec. 1 since the USDA started collecting data in 1996, according to the agency.

The USDA also increased its projection for 2014 per capita beef consumption by 0.6 percent. The American economy is expected to expand 2.6 percent next year from 1.7 percent in 2013, according the median of 78 forecasts compiled by Bloomberg.

Higher beef prices will raise costs for retailers while consumers are expected to pay as much as 3.5 percent more for the meat in 2014, USDA projects.

Cattle futures for February delivery increased by 0.6 percent to  $1.3495 a pound at 1 p.m. on the Chicago Mercantile Exchange (CME), after hitting $1.35275, the highest for a most-active contract since the cattle futures began trading on the CME in 1964.

Fewer cattle will likely cut the supply of beef to retailers, further pushing up prices — for packers as well as retailers and consumers.

Monthly retail price data showed beef in November at a record $5.41 per lb, surpassing the October record of $5.36, according to the USDA's Economic Research Service.

American beef producers have reduced the U.S. herd to its lowest level since the early 1950s in response to drought in major production areas as well as high feed and hay costs.

Additionally, colder temperatures have slowed feedlot cattle weight gains and reduced the number of animals available to packing facilities.

Processors have been forced to pay more for cattle despite negative operating margins, although the closure of packing plants over the Christmas and New Year's holidays limited their need for supplies temporarily.

A fire in the kill floor area that temporarily halted production at Cargill Inc's beef plant in Dodge City, Kan., on Monday, Dec. 23, gave rise to concern that ranchers and feedlots would be paid less for their cattle in the surrounding area but the plant resumed normal operation much sooner than expected and had already planned to suspend operations on Christmas day.

Some market analysts were surprised at the higher prices but said it likely reflects efforts to gear up for beef features in retail stores.  

Based on strong prices for some beef cuts, such as rounds and chucks, retailers are likely gearing up to feature beef in the new year, analysts say, as two weeks of reduced slaughters will mean the beef pipeline is tight.

While feedlots are making profits on cattle, the beef companies that buy and process them are not, analysts said.

U.S. beef packers on Friday were estimated to lose $73.50 per head of cattle, compared with a loss of $72.55 on Thursday and a loss $43.30 a week earlier.

January through March are normally the tightest months for packer margins due to the seasonal decline in supplies.

And in another development that could further boost beef prices down the road, China may soon be open to U.S. beef imports.

That development is in response to USDA approval of China to process chickens for the American market. £

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