Yesterday we spoke with James Robb a Director at the Livestock Marketing Information Center (LMIC) regarding the looming crash in beef prices. Below please find the materials and associated audio from our conversation:
AUDIO: CLICK HERE
MATERIALS: CLICK HERE
A 50% decline in beef prices back to historical averages is well within the realm of possibilities. Below is a 30 year look at Feeder Cattle CME $/lb., current levels are greater than two standard deviations above the average. The information that James Robb provided supports the potential decline down to historical levels.
Corn, a core component of feed has been volatile, and is projected to stay that way when looking short-term. When looking longer term prices have leveled off and are projected by LMIC to remain stagnant to slightly down.
Heifers can either go to feed lots to be slaughtered or to breeding herds for beef cow replacement. In the chart below you see that heifers being held for beef cow replacement ticked up +6.5% in 2015. In simple terms that means for the time being the herd is growing and less cows are being slaughtered.
The decrease in slaughtered cattle is because you simple don’t need as many cows, because they weigh more than ever.
Cattle cycles typically run anywhere from seven to ten years. We are at about the two year mark and LMIC predicts that we are still 2-3 years away from the peak. This means declining prices for longer, providing a tailwind for restaurant companies until 2018. Cattle inventory is projected to rise sharply as shown by the brown line in the chart below.
What event(s) could lead to significantly lower prices?
- Macroeconomic factors, if the U.S. economy goes into a recession in 2017, prices will fall.
- Mother nature, if we get another drought in the southern plains, we will have a herd liquidation that will have a short term impact on supply.
Will the lower for longer corn market lead to lower beef prices?
- Yes, cost of production eventually works through the system after a certain period of lag. If corn stays stable or trends lower that will be supportive of continued herd growth and lower prices.
Lower beef price will benefit many companies across both the quick service and casual dining sectors. We want to highlight a couple of our core LONG positions, McDonald’s (MCD) and Del Frisco’s Restaurant Group (DFRG). MCD buys roughly $1bn of beef per year for its burgers and with prices set to drop considerably over the coming years, this will continue to be a strong tailwind for the company as it navigates its turnaround. DFRG’s Double Eagle franchise is a dominant player in the high-end steak industry, lower beef prices will be a major tailwind for this company as it is currently battling traffic issues.
Other companies that benefit are SHAK, QSR, SONC, JACK, BLMN, HABT, WEN and RRGB. SONC, JACK and WEN remain on our SHORT list due to a more challenging sales environment and aggressive street expectations. In addition, valuations for all three companies remain extended, but have come in due to the decline in the stock prices over the past 6 months.
Please call or e-mail with any questions.