U.S. Drought to Send Beef Prices Soaring (RRGB, WEN, MCD, RUTH, TSN, PPC, SFD)

The first official warning of food price increases due to the U.S. drought came last month, when the U.S. Department of Agriculture forecast an increase of 2.5% to 3.5% for food consumed at home in 2012, rising to an increase of 3%-4% in 2013. Beef and veal prices are expected to rise 4%-5% in 2013.

Beef prices will rise due to higher prices for corn and other feed. Cattle are typically fed for up to 18 months in pastures that this year have been decimated by drought. Then most spend another 5 months or so at a feedlot eating corn. A report at Bloomberg notes that cattle are spending 2-3 months less on pasture this year and are being sold early for slaughter.

To avoid the expense of buying either hay or corn, many ranchers are culling their herds, which is keeping the cost of beef somewhat lower now, but with the effect of sending prices skyward by late 2012 and early 2013. There simply won’t be enough beef available to meet demand.

It’s worth noting that beef is not the only victim of higher prices. Pork and chicken also eat corn and the higher feed prices are having the same impact on these producers as well.

Hamburger havens like Red Robin Gourmet Burgers Inc. (NASDAQ: RRGB), The Wendy’s Co. (NASDAQ: WEN), and even McDonald’s Corp. (NYSE: MCD) could feel the pinch and will likely raise prices. Higher-end steakhouses like Ruth’s Hospitality Group Inc. (NASDAQ: RUTH) are also considering price hikes. And food processors like Tyson Foods Inc. (NYSE: TSN), Pilgrim’s Pride Corp. (NYSE: PPC), and Smithfield Foods Inc. (NYSE: SFD) won’t escape the impact of higher feed costs either.

Paul Ausick