Who feels the impact?
Beef prices went up in 2014 from a shortage of supply caused by poor weather in the United States. Restaurants that offer a variety of beef options such as burgers and steaks were impacted the most by price movements in the beef commodity.
In the above graph, we’ve plotted live cattle spot and futures prices. Live cattle is processed into various beef cuts. McDonald’s uses round, sirloin, and chuck cuts of beef to make its hamburger patties. The current active futures price for beef has increased to $1.51 per pound in the week of July 3, up from $1.48 per pound a week ago.
Although beef prices increased slightly, they’ve been on a downtrend trend since the beginning of 2015. Compared to a five-year historical average, beef prices are expected to remain elevated for the rest of 2015.
Restaurants such as McDonald’s (MCD), KFC under the umbrella of Yum! Brands (YUM), Wendy’s (WEN), and Shake Shack (SHAK) will experience cost pressures from beef in 2015. McDonald’s experienced a 2% increase in commodity costs in 1Q15 primarily because of beef, but it passed on that cost to customers by increasing menu prices. Shake Shack, Chipotle, and other players in the industry have also increased their menu prices. The Consumer Discretionary Select Sector SPDR Fund (XLY) holds about 4% of McDonald’s.
Why are beef prices lower this year?
Severe weather conditions in 2013 affected crop production, which resulted in a shortage of feed for cattle. This led to a price increase for cattle in 2014, as you can see in the above chart. Conditions have stabilized, however, and prices for live cattle have started to drop.