Why You May Avoid Beef This Summer

Fellow grillers would agree. The aroma of beef wafting from grills — and my apologies to vegetarians — is a wonderful thing, especially in summer. The sizzle of marinated juices, perhaps some corn on the cob on the side slathered in butter, is enough to slam my taste buds into overdrive.

But sticker shock — the pained reaction to that number sitting in front of the dollar sign — has left some cautious about firing up the grill. Beef prices this summer are up about 11% since this time last year.

Prices at the wholesale level are high, too, leaving restaurants in the difficult position of trying to figure out how to maintain margins without offending patrons. Dry weather across the cattle-producing Great Plains, drought in California, last October’s Northern Plains blizzard and last winter’s polar vortex are trimming menu choices and portions.

For those of us who buy 250 to 400 pounds of beef directly from the ranch every fall at wholesale prices, we face the sticker shock only once a year. Wholesale prices, however, have increased about 15% in the last year.

Restaurants, which like to avoid changing their menu every week, are having a tough time staying ahead of shrinking margins as prices fluctuate week to week. For example, rib-eye wholesaled at $7.48 a pound July 11 and dropped to $6.86 a pound July 18. That’s an 8% change in margin in just one week. But it’s bound to bounce right back up.

The issue is, the nation’s cattle herd dropped to a 60-year low this spring and the price of beef reached record highs, and that’s just not a dip you recover from quickly. The Great Plains drought dried up the rangeland feed, leaving grass-fed cattle with very little to eat. As a result, ranchers sold off as many cows as they could while still keeping their ranches viable.

The California drought reduced herds there for the same reason: nothing to eat.

What’s more, last year’s early-October blizzard across western South Dakota killed tens of thousands of head just before fall roundups. South Dakota — my home state — is what’s known as a cow-calf state, which means each cow produces a calf, resulting in more meat on the hook. When the blizzard killed large herds, it killed a chunk of the supply chain across the whole industry.

But the freeze, as you all know, wasn’t just regionalized to South Dakota. Last winter’s polar vortex killed a great deal of cattle and it also kept large quantities off the market because cattlemen did not want to risk losses while transporting animals in the freezing cold weather.

All in all, Mother Nature has stacked the deck against steak lovers. The brutal combination of a harsh winter and substantial drought has culled the herds in the United States, putting beef in short supply.

The High Price of Steak

At the risk of driving away customers, restaurants could beef up the price of steak and gourmet burgers to compensate for wholesale prices. But instead, we’re seeing chains such as Ruth’s Chris Steakhouse (Nasdaq: RUTH) add smaller portions. Applebee’s — which is privately held — pulled steak off the bargain “Two for $20” menu — and they are making the portions smaller. At Applebee’s, a once six-ounce steak is now a meager four ounces.

The cost of ground beef has forced Chipotle Mexican Grill (NYSE: CMG) to raise prices 8% in May. McDonald’s (NYSE: MCD) and Yum Brands (NYSE: YUM) are increasing their prices in small increments, too. Meanwhile, Texas Roadhouse (Nasdaq: TXRH) and LongHorn Steakhouse, owned by Darden Restaurants (NYSE: DRI) are also battling to balance menu prices and portions while maintaining customer traffic.

Granted, that trend is poised to end, albeit gradually. Herds are already increasing and cattlemen estimate that they will be back to a normal level in two years.

So what to do in the meantime?

The Restaurant Round-Up

The good news is that more cattle are heading to the slaughterhouse, which will gradually bring down the wholesale price. Last June, 286,000 cattle went to the packing plant and this June the number reached 352,000, a 19% increase.

As the supply increases, prices will fall and margins for restaurants will increase.

But how will you know the best restaurants to invest in a year from now?

All you have to do is check the menu. The ones that will have the fattest margins will be the ones sticking to the smaller portions, meaning profits will sizzle as the price of beef falls in 2016.

Until the price of beef slips lower, restaurants are making their menus more enticing with reasonably priced side dishes even as beef portions shrink. They are working hard to ensure you and I still eat out. While most of Wall Street has counted this group out, restaurants are proving that they can still attract customers.

To take advantage of their underlying strength, I recommend buying the Dynamic Leisure and Entertainment ETF (NYSEArca:PEJ). The ETF has been outperforming the S&P 500 for a year and a half and gained 12% in the last 12 months.

Beef prices will remain high for a while, but that doesn’t mean you have to stop consuming the tasty morsels — or at least, stop profiting on it.

There’s a silver lining in every cloud,

Chris Orr
Editor, Weather Trader

P.S. Whether you continue eating beef this summer or decide to cut it from your pallet, one of my colleagues has some advice on finding the best quality beef, and how to avoid all those dangerous and taste-conflicting additives.

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