Corn Costs Signal Biggest Beef Surge Since 2003 as Herds Shrink

Corn Costs Signal Biggest Beef Surge Since 2003 as Herds Shrink

By Jeff Wilson
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May 27 (Bloomberg) -- Enjoy your next steak, because prices from Shanghai to San Francisco are only going up.

The highest corn prices since at least the Civil War, based on Chicago Board of Trade data, mean U.S. feedlots are losing money on every animal they sell, discouraging production as rising global incomes increase meat consumption and a declining dollar spurs exports. Cattle may rise 13 percent by the end of the year on the Chicago Mercantile Exchange and Brazil's Bolsa de Mercadorias e Futuros, futures contracts show.

Not since 1996, when corn reached what was then a record $5 a bushel, have cattle been this cheap relative to their primary source of feed. Cattle are the seventh-worst performer of the 26-member UBS Bloomberg Constant Maturity Commodity Index in the past year, a time when soybeans, oil and copper jumped to records. After adjusting for inflation, cattle are down 27 percent from their 1988 peak.

``It's pretty certain that we'll see a decline in domestic supply in the U.S.,'' Joesley Batista, chief executive officer of JBS SA, the world's biggest beef producer, told reporters in Sao Paulo on May 15. ``As a result, we'll have price hikes and improved margins.''

Production also is dropping or failing to keep pace with demand in China, Brazil and the European Union, mostly for grain-fed beef, analysts and government data show.

``We expect meat prices, especially beef prices, to rise this year,'' said Peter Weeks, chief economist at Meat & Livestock Australia, a trade group in Sydney. ``We've already seen big increases in beef prices in China, Russia, India and throughout Southeast Asia.''

Food Inflation

The beef rally risks accelerating global food inflation, which has sparked riots from Haiti to Egypt. In the U.S., food prices will jump 5.5 percent this year, the fastest pace since 1989, according to the U.S. Department of Agriculture.

``Our demand far exceeds supplies, and our production is stagnating,'' Liu Qiangde, deputy general secretary, China National Cattle Association, said in Beijing.

Wholesale choice-grade beef in the U.S., the world's biggest producer and consumer, will rise 16 percent to a record average of $1.86 a pound next year, the biggest gain since 2003 and the second-largest since 1979, said Len Steiner, a principal at Manchester, New Hampshire-based Steiner Consulting Group, which provides research to the food industry.

Steakhouse Partners Inc., operators of 21 steakhouses in California and the Midwest, filed for bankruptcy May 16, citing rising costs for corn-fed beef.

Feedlot Losses

Cattle prices haven't kept pace with the grain used to feed the animals. Corn surged to a record $6.39 a bushel on May 9 from $3.6625 a year earlier.

Feedlots lost money on animals sold for slaughter the past 11 months, including $139.56 a head in April, compared with a profit of $46.79 a year earlier, said Erica Rosa, an economist at the Livestock Marketing Information Center in Lakewood, Colorado. Losses were a record $169.80 per animal in March, and feedlots may not be profitable until after October, she said.

``Higher prices are necessary for survival of the industry,'' said Douglas Carper, 58, the principal of Omaha, Nebraska-based DEC Capital Inc., which manages or consults for $300 million in commodity investments. ``The job of the market now is to create a price high enough that provides the industry with profitability.''

Corn more than doubled in the past two years as demand for meat boosted feed consumption and U.S. government mandates and subsidies promoted the use of grain-based ethanol. Cattle futures gained just 31 percent over the period, and cash prices rose 16 percent.

Rising Prices

Richard Bond, the chief executive officer of Tyson Foods Inc., the world's largest meat processor, said that the ethanol boom has boosted feed costs so much that consumers should expect higher meat prices.

A 1,250-pound (567-kilogram) steer in the U.S. is worth about 4.2 times the cost of the corn he consumes over five months to reach slaughter weight, down from almost 12 times in December 2005 and the lowest since June 1996.

Cattle may not remain cheap for long. Prices jumped 6.5 percent last month, the most since August 2006, and there are signs of reduced supply from U.S. producers.

As of May 1, feedlots held 11.1 million head, down 1.4 percent from a year earlier, the government said. Ranchers last year cut the number of young females they held by 3.5 percent to 5.67 million on Jan. 1, the second straight annual decline.

Export Demand

As the incentive for producers dwindles, demand for U.S. beef exports will jump 14 percent next year, the USDA said. Sales will increase because of a declining dollar, rising global incomes and a relaxation of bans imposed after a case of mad-cow disease in 2003, the USDA said.

U.S. beef exports in the first quarter rose 29 percent from a year earlier, data from the USDA show. Increasing beef shipments to Russia, South Korea and other emerging economies will help push up prices in the U.S., JBS's Batista said.

Global demand for beef, pork and chicken may grow as much as 50 percent by 2020 as the population increases and incomes improve, a study by Rural Industries Research and Development Corp. said in December.

``We are witnessing the globalization of meat as incomes rise,'' said David Kruse, president of CommStock Investments Inc., an agricultural broker and researcher in Royal, Iowa. ``The first thing these consumers buy as their incomes rise is more and better food, not a flat-screen television or a computer.''

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India's Rice Farmers Abandon Paddies, Deepening Global Shortage

By Thomas Kutty Abraham
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May 27 (Bloomberg) -- Kurukkupotta Kandai Vasu's family has grown rice in Kerala, India, for four generations. Now, the 62- year-old farmer buys the food staple in his local store.

When the annual monsoon rains reach India's southernmost state this week, Vasu will sit out the planting season because he can't recoup the cost of fertilizer, seeds and pesticides.

``The cost of cultivation has more than doubled, but the yield has only fallen,'' said Vasu, pointing at his barren paddy field below a green hill near Mundur, a village 2,665 kilometers (1,656 miles) from New Delhi. ``There's a shortage of rice globally, and the government is finding it difficult to supply enough rice to people at a reasonable price.''

To ensure it can feed India's 600 million poor, the government banned rice exports April 1, contributing to a shortage on world markets that drove the price of the grain to a record last month and sparked food riots from Haiti to Egypt. The curb caused local prices to lag behind the international increase, encouraging Vasu and other growers to switch to more lucrative crops and further reducing supply.

``Paddy cultivation today is a complete loss for the farmers,'' said K.A. Jayachandran, 64, who advises farmers on growing and cultivation techniques at the Integrated Rural Technology Centre, a nongovernment organization. ``If the farmer doesn't make money in one season, then he's ruined.''

The area growing rice in Kerala has fallen to 276,000 hectares (682,000 acres) in 2006 from 801,700 hectares in 1980, according to the state's Planning Board. Production almost halved to 630,000 tons from 1.27 million during the same period.

Price Tripled

The price of rough rice has almost tripled in the past two years, reaching a record $25.07 a 100 pounds on April 24 on the Chicago Board of Trade. It closed at $20.35 a 100 pounds on May 23. In India, rice sells for 18 rupees a kilogram (19 cents a pound) at local markets, and government-run stores distribute it to the poor for a sixth of that price.

To make ends meet, Vasu and his two brothers have devoted a fifth of their 20-acre plot to vegetables to feed their family, and reckon they can double the 10,000 rupees ($234) they earned from one acre of paddy by planting natural rubber.

Rubber prices rose to a record 123 rupees a kilo in Kerala after crude oil prices more than doubled in a year, according to the government's Rubber Board. The state accounts for more than 90 percent of the natural rubber produced in India, the world's fourth-biggest grower.

Tropical Climate

The tropical climate in Kerala is ideal for rubber, helping growers achieve an average yield of 1,879 kilograms a hectare, the highest in the world. The area producing rubber has almost doubled to 494,400 hectares during the past 25 years, according to the Planning Board. Still, government curbs on converting paddy land for cash crops are forcing farmers to hold back.

Since 2002, the local government has required paddy farmers to obtain permission to put their farmland to other uses, though construction of houses is permitted in small plots.

The order restricting land use hasn't been effective because it isn't widely enforced, said K. Jayakumar, Kerala's agriculture production commissioner. The state plans to introduce rules that will prevent the use of wetland for purposes other than rice.

``There's a crisis, and we see an opportunity in this to address this issue to some extent,'' he said. ``The state plans to double rice production in the next two years.''

Knee-Deep in Water

The prospect of spending six months of the year knee-deep in brown paddy water for scant reward is encouraging rice farmers to abandon their land. About 2.5 million people, or a 10th of the state's population, work in the Middle East, where they help build apartments, hotels and offices.

The exodus has led to a tripling of wages for day laborers who stayed behind, and fueled a building boom on drained paddy fields as engineers, surveyors and construction workers send money back.

At least 60 percent of the land traditionally used for rice in the Palakkad district, about 110 kilometers northeast of Kochi, Kerala's largest city, has been lost to other crops and to the construction of homes, villas and shopping malls, said Jayachandran.

The share of agricultural land devoted to food crops, including rice, fell to 12.5 percent in the year ended March 31, 2006, from 37.5 percent in 1981.

``The younger generation no longer wants to dirty his feet and hands working in paddy fields,'' says Jayachandran. ``He prefers a job in a factory or a shop.''

Vasu may well be the last rice farmer in his family. His 29-year-old son, who earned a diploma in electronics engineering, works in a cement company.

Still, Vasu said he could be tempted to resume rice farming if the government increased subsidies above the 160 rupees an acre it pays, and provided cheaper fertilizer and pesticides.

``Rice is close to our heart,'' Vasu said. ``But we need to be practical.''