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Higher prices will test consumers’ taste for beef

(Reuters) — Lady Gaga’s favourite Judas Priest burger will still cost $12 at Kuma’s Corner as the  trendy Chicago eatery resists raising prices, even though the cost of making that burger has gone up.

“You can’t pass it on, not in times like this,” Kuma’s manager Frank DeBoss said of the higher beef prices, which recently rose 10 per cent.

The Chicago eatery, a favourite of the New York-born singer, is facing the same pressures as other restaurants around the country as they are paying more for beef due to smaller supplies here and overseas.

While grocery stores and restaurants have been trying to absorb much of the increased costs during the shaky economy, analysts predict consumers will soon pay more as supplies shrink and beef plants pass on the higher prices they are paying for cattle.

“Retailers have absorbed margins and restaurants too,” said Jim Robb, economist at the Livestock Marketing Information Center. “The dilemma is will the U.S. economy grow fast enough to allow them to pass on the higher costs? That is the unanswered question.”

Beef prices are being pushed higher because production is dropping in the United States and around the world. Also, as the economy gains traction consumers here and overseas are eating more of it.

Shrinking herd

The U.S. cattle herd is the smallest in 50 years and is expected to get even smaller as near record high prices for steers and heifers have ranchers selling off their breeding stock rather than rebuilding herds.

Cattle traded this week at $108 per 100 pounds, the highest in seven years, and some analysts predict record highs of $120 or more later this year.

While the cattle herd and beef production shrink, demand is on the rise.

Foreign countries are buying more U.S. beef because of improving economies there and because of production problems in their traditional suppliers, such as flood-ravaged Australia.

U.S. beef exports in 2010 through November are up 25 per cent from a year earlier.

“The largest beef supplier is the United States right now,” said Eric Ocrant, vice-president of Chicago-based Oak Investment Group.

China, a country with 1.3 billion people, is expected to start buying U.S. beef after a seven-year absence due in part to flooding in Australia reducing beef exports.

Buying habits

As beef prices go up, consumers will change their buying habits favouring smaller portions or lower-cost alternatives, such as more hamburgers and fewer steaks, said Alton Kalo, analyst the consultancy Steiner Consulting.

“From high-end steak houses to casual chains, everybody has a burger on the menu because they find that is a better deal for consumers,” said Kalo.

“There will be incremental increases in beef prices as we go forward.”

In 2008, when food and fuel prices spiked higher, consumers switched to hamburgers from steaks. Kalo said that could happen again.

As Kuma’s Corner has discovered, even hamburgers will be expensive. Much of the meat used for U.S. hamburgers is imported, primarily from Australia, and that supply is down, which has increased costs of the raw materials nearly 20 per cent in 2010.

“Because Australia is not shipping product to the U.S. that has caused a significant inflation in those materials,” he said.

— Bob Burgdorfer writes for Reuters from Chicago.

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