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Beef’s Short Supply Leads Food Prices Higher

8 April 2015 in Trading Ideas

Some bad news for consumers could be a windfall for both farmers and investors in stocks that might benefit from rising food prices.

The price of ground beef, one of the most popular meat products in the nation, climbed to a record high last week as supply continues to lag behind demand.1

The Milwaukee Journal-Sentinel reported that the average price of a pound of ground beef hit $4.24, according to the Bureau of Labor Statistics. That’s the highest amount ever – and is up around 90% from five years ago.

“We are going to see higher beef prices; we don’t anticipate a lot of reprieve here,” Brenda Boetel, an agricultural economics professor and associate dean at the University of Wisconsin-River Falls, told the Journal-Sentinel.

Although the US beef cattle herd has grown in recent months after shrinking to a size not seen in decades, it hasn’t kept pace with the demand for some cuts of meat and a rapid increase in demand from Asia.

Complicating matters is that it takes nearly three years to raise cattle for beef from conception to consumption, in contrast with pork and poultry, where pigs and chickens mature much quicker, the Journal-Sentinel said.

Meat prices also will likely continue to rise from the effects of the drought in Texas and Oklahoma, as cattle ranchers haven’t expanded their herds much because of high feed costs, according to the article.

Overall beef prices have jumped 19% from a year earlier, while the USDA is forecasting both beef and veal prices will rise another 5% to 6% this year. In addition, pork and dairy prices, along with fresh vegetables, are expected to rise 2% to 3% in 2015.

As USDA economist Annemarie Kuhns put it: “It’s going to be a lot of the items around the perimeter of the store, some of the meats, produce, that will see slightly higher-than-average inflation than a lot of the goods within the center aisles, the non-perishable goods, cereals, bakery products, sugars and sweets and non-alcoholic beverages.”2

As a result, the USDA sees overall grocery prices rising 2% to 3%.

While pinching the pockets of consumers, the increase could help investors in stocks of companies that could benefit.

The Rising Food Prices motif has gained 6.6% in the past month. In that same time frame, the S&P 500 has increased 0.2%.

So far in 2015, the motif has risen 5.7%; the S&P 500 is up 1.6%. For the past 12 months, Rising Food Prices motif is up 16.1% while the S&P is up 15.4%.

Interestingly, the USDA’s 2%-3% forecast for 2015 represents what it calls “slightly lower-than-average” food price inflation, although 2014 did see a 2.5% rise in overall supermarket prices.3

One caveat, however: the USDA’s projection is based on “normal weather conditions,” with the agency conceding that “severe weather events could potentially drive up food prices beyond the current forecasts.”

Based on California’s decision last week to enforce mandatory water use reductions of 25% across the state because a continuing four-year drought, those monitoring rising food prices could see the trend continue.

1Rick Barrett, “With demand outstripping supply, beef prices hit record,” jsonline.com, March 301, 2015, http://www.jsonline.com/business/with-demand-outstripping-supply-beef-prices-hit-record-b99471967z1-298075441.html, (accessed April 6, 2015).

2Matt Kelley, “USDA reports food prices going up, led by beef,” radioiowa.com, March 20, 2015, http://www.radioiowa.com/2015/03/20/usda-reports-food-prices-going-up/, (accessed April 6, 2015).

3US Department of Agriculture, Food Price Outlook, Feb. 2015, http://www.ers.usda.gov/data-products/food-price-outlook/summary-findings.aspx, (accessed April 6, 2015).