Polar Vortex Freezes Out Cattle Herd and McDonald’s Commodity Costs
Consumers weren’t the only ones who suffered from the frigid temperatures that froze parts of the U.S. last week — cattle did, too, and now, more than just a few parties are paying the price for it. According to Bloomberg, the bone-chilling temperatures that residents experienced last week slowed the growth of livestock significantly, leading to higher beef costs that are especially expected to affect restaurants like McDonald’s Corp. (NYSE:MCD) and Texas Roadhouse Inc.
The U.S. cattle herd has already contracted for six straight years to the smallest size since 1952, and these latest temperatures will now shrink figures even further as ranchers are forced to sell the cattle they can’t afford to feed; fewer cattle result in increased prices. Bloomberg reports that the U.S. Department of Agriculture said the $85 billion beef industry will drop to a 20-year low in 2014, and commercial beef output in the country may drop 5.4 percent this year to 24.32 billion pounds, the lowest since 1994.
As you can imagine, restaurants like McDonald’s are feeling the pinch. Peter J. Bensen, the chain’s chief financial officer, said to Bloomberg in October that beef remains one of the company’s “biggest impacts on commodity cost,” and that is now more evident than ever. Texas Roadhouse, also facing rising costs, was forced to raise prices in the last two years “to fight off what’s been pretty high beef inflation,” the news service reports, and now a number of companies will need to strategize how they can withstand increased expenses.
Beef has been a hot topic for McDonald’s in recent weeks, as the Oak Brook, Illinois-based chain recently made a commitment to only source “verified sustainable beef” by 2016. McDonald’s is now preparing for its pledge that will help make its meat production greener and more animal friendly, but as it collaborates with stakeholders, it is clear that it will need to keep the rising cost of beef at the back of its mind.
According to Bloomberg, prices that settled at $1.37075 on Monday may reach $1.405 in 2014. Cattle futures have now climbed for five straight years through 2013, the longest streak on record. Last week’s freeze significantly affected ranchers because animals have a harder time staying warm doing cold weather, and when low temperatures hit, ranchers are forced to feed the cattle more to maintain their body temperature, along with simply maintaining their weight.
When ranchers can’t afford the cost of excess food, they are coerced into contracting their herd. Paul Looney, a Texas-based rancher, said to Bloomberg on Tuesday: “You sell your cattle because you can’t afford to feed them. We were hit across the board in Texas. Everyone had to reduce herd size, so that impacts the whole beef business, from the ranch to the plate.”
Another reality about the U.S. beef industry is that there is actually a shrinking demand for beef in the country. Bloomberg reports that per-capita consumption of the meat may shrink to 53.6 pounds this year, the lowest since at least 1970.