US meat eaters dealing with record prices before peak in demand for summer grilling, as domestic cattle herd the smallest since 1951 following years of drought and high feed costs, spread of piglet-killing disease that's tightening hog supplies

Nevin Barich

CHICAGO , March 25, 2014 (Bloomberg LP) – Competitive eater and restaurant owner Jamie McDonald had no problem downing almost a dozen 11.5- ounce hamburgers in 10 minutes, or 9 pounds, 7.4 ounces of pulled pork. It’s the cost of the meat that’s making him gag.

McDonald, who used $70,000 of his eating-contest prizes since 2012 to open Bear’s Smokehouse BBQ last June in Windsor, Connecticut, plans to raise menu prices 10 percent to limit the profit squeeze on 5,000 pounds (2.27 metric tons) of weekly meat purchases. His bill reached $12,000 as beef costs jumped 30 percent in six months and pork surged 20 percent in March.

“That’s not going to be the last increase,” said McDonald, 37, known as “The Bear” and the All Pro Eating Promotions title holder in apple pie, fried pies, hamantash, hamburgers, onion rings, pulled pork and (hands free) pumpkin pie. “There’s not really an end in sight yet.”

At a time of year when U.S. prices usually are at seasonal lows, meat is rising faster than any other food group, even before the peak in demand for summer grilling. The domestic cattle herd is the smallest since 1951, after years of drought and high feed costs, and the spread of a piglet-killing disease is tightening hog supplies. Cattle and hog futures in Chicago reached record highs this month.

While higher wholesale prices are a boon to suppliers including Tyson Foods Inc., they are eroding profit margins at Chipotle Mexican Grill Inc. restaurants and at Hormel Foods Corp., the maker of Spam meat spreads. Vienna Beef Ltd. and Best Chicago Meat Co. said they are charging customers more for their hot dogs and sausages.

UNUSUAL RALLY

“This is very unusual to see this kind of price increase this early in the season,” Donnie King, the president of prepared foods at Springdale, Arkansas-based Tyson, the largest U.S. processor of beef and chicken, said in a March 13 presentation to analysts.

Cattle futures reached an all-time high of $1.46825 a pound on March 5 on the Chicago Mercantile Exchange, up 25 percent from last year’s low in May. Hog futures surged to a record $1.33425 a pound on March 18 and are up 48 percent this year, trailing only coffee among 24 commodities tracked by the Standard & Poor’s GSCI Spot Index.

Domestic wholesale pork is up even more, gaining 56 percent this year to $1.315 a pound on March 21, while beef advanced 20 percent, after touching $2.4406 a pound on March 18, the most since the U.S. Department of Agriculture began using its current measure in 2004.

RETAIL OUTLOOK

As of Feb. 25, the USDA predicts retail beef and poultry prices will advance 3 percent to 4 percent this year, faster than the 2.5 percent to 3.5 percent increase forecast for all foods. Steve Meyer, a consulting economist in Adel, Iowa, for the National Pork Board, said the government’s meat forecasts are too low, and that pork will jump as much as 10 percent.

“With the kind of supply situation we’re going to be in this summer, I don’t think there’s any way we’re going to avoid records” for beef and pork, Meyer said.

At Vienna Beef in Chicago, which has been making sausages and deli meats for 121 years and produces more than 150 million hot dogs annually, Co-President Jack Bodman said he’s been surprised by the surge in costs before the grilling season starts and that retail prices may increase until demand slows.

“We’ve had to raise prices more than once this year,” Bodman said. “This type of market shift will affect all processors and all consumers eventually. It may not happen immediately with everybody. Eventually, the cost goes in.”

SQUEEZING MARGINS

Higher meat costs reduced fourth-quarter profit margins at Premium Brands Holding Corp. to 18.4 percent from 19.9 percent a year earlier. The Richmond, British Columbia-based maker of pre- packaged sandwiches and burgers boosted prices twice during the quarter in most products, Chief Executive Officer George Paleologou said on a March 13 call.

Costs will keep rising in the second half of the year, according to Chicago-based Hillshire Brands Co., the maker of Ball Park hot dogs. “We’re taking broader pricing actions than we anticipated,” Hillshire President Sean Connolly said on a Jan. 30 call.

At Best Chicago Meat, which sells 20 million pounds of pork and beef to 400 grocery stores, including Moo & Oink ribs and David’s Kosher hot dogs, prices have been increased to reflect costs that are up as much as 10 percent since the end of December, President David Van Kampen said.

“We’ve had to cut back on some promotions and things like that to keep our margins where we need to stay above water,” said Van Kampen, a four-decade veteran of the meat business. “We’re hoping that we’re going to see some relief coming into April and May. If not, then we’re going to have to go for another round of price increases going into early summer.”

CONSUMERS BALK

Consumers may balk at the increases. A survey of 1,900 people last year showed 39 percent are eating less red meat, citing higher prices as the lead deterrent, behind health concerns, according to researcher Mintel Group Ltd. in Chicago. Red-meat consumption will drop to 101.7 pounds per person this year, from 104.4 in 2013, according to the USDA.

“I don’t think people totally quit eating beef or pork,” said John Nalivka, the president of Sterling Marketing Inc. in Vale, Oregon. “They just buy less.”

The higher costs may spur a switch to chicken. The USDA estimates poultry consumption will increase to 100.1 pounds per person this year from 99.1 pounds in 2013.

“When you look at beef and pork, the competing meats, it does give chicken a window to step up and seize a little bit of the market,” said Bill Roegnigk, an economist for the Washington-based National Chicken Council.

Higher prices also may encourage cattle- and hog-herd expansion. About 1.65 million cattle were added last month to U.S. feedlots, where the animals are fattened for slaughter, a 15 percent increase from February 2013, the USDA said March 21.

BULLISH BETS

Hedge funds and other large speculators are betting Chicago futures have yet to peak. Net-long positions in cattle reached 136,951 contracts on March 18, the highest since September 2010, U.S. Commodity Futures Trading Commission data show. Net-bullish wagers on hogs were at 70,878 contracts, up 84 percent since mid-January.

Herd expansion won’t expand supplies right away. It can take three years to breed a cow and raise a calf to slaughter weight, including four to five months on a feedlot.

“It’s probably going to be another one to two years before things start to taper back” for consumers, said Ann Marie Bosshamer, executive director of the Nebraska Beef Council based in Kearney.

PIG VIRUS

For hogs, supplies have been reduced by the spread of porcine epidemic diarrhea virus, known as PED, which was first confirmed in Iowa in May. The disease, which is deadly to piglets, has since been reported in 27 states with 4,757 total cases. It can take two years to expand production.

Consumers may be reluctant to cut back on eating their beloved burgers or beef tips, even with higher prices, said Mike Miller, senior vice president of the National Cattlemen’s Beef Association in Centennial, Colorado.

“I really can’t see people giving up bacon because of the price, unless it was extreme and causing troubles,” said Marianne Clark, a 42-year-old Santa Barbara, California resident who runs fan website RoyalBaconSociety.com. “Prices are still reasonable.”

Americans eat more beef than any other country, with consumption this year expected to reach 11 million metric tons, according to the USDA. Pork demand will total 8.8 million tons, behind only China, government data show.

RISING COSTS

Beef costs will rise 4 percent to 8 percent this year at Ruth’s Hospitality Group Inc., the Heathrow, Florida-based owner of the Ruth’s Chris Steakhouse chain, CFO Arne G. Haak said on a Feb. 21 conference call.

Rising meat costs and food inflation may force Denver-based Chipotle to raise menu prices 3 percent to 5 percent, CFO John R. “Jack” Hartung said on a conference call Jan. 30.

“Beef’s at an all-time high in some categories,” Richard Galanti, the chief financial officer at Issaquah, Washington- based Costco Wholesale Corp., the largest U.S. warehouse-club chain, said on a March 6 earnings call. “That’s raining on everybody.”

That includes Bear’s Smokehouse BBQ, where owner McDonald said he’ll work extra shifts to save on labor costs, though it won’t be enough to cover the extra spending on meat for the likes of his bacon-wrapped meatballs, dubbed “moink balls.” He’s also looking to generate some cash from eating contests as he sticks to his plan to open two more stores in the next six months.

“It’s going to be a tight few months until prices start coming back down,” McDonald said. “It’s only going to be getting worse before it gets better.”

To contact the reporter on this story: Megan Durisin in Chicago at mdurisin1@bloomberg.net To contact the editors responsible for this story: Millie Munshi at mmunshi@bloomberg.net Steve Stroth

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