By Theopolis Waters
CHICAGO (Reuters) - When top U.S. meat packer Tyson Foods Inc abruptly announced it would stop buying cattle fed with a widely used drug that can add more than 30 pounds to the average steer, the implications for markets were clear: less meat, higher prices.
Tyson, which buys about one in four of all U.S. cattle for slaughter, says it will stop purchasing livestock with the growth additive Zilmax in order to protect the animal's welfare, a sign of the growing sway of animal rights activists. Some cattle appear to have had trouble walking with the added weight.
While the move could put a dent in Tyson's margins by limiting its choice to higher-cost cattle, some analysts also saw a potential commercial benefit -- exports. Big meat importers including Russia and China moved recently to ban a similar growth-enhancing drug, ractopamine, used in pigs.
But either way, the question now is whether others will follow. So far Tyson, which on average processes 132,000 head of cattle per week, stands alone in boycotting a drug used in half or more of the U.S. herd, according to industry sources.
Cargill Inc, the nation's third-biggest meat producer, said it does not plan to change the way it currently buys cattle. A spokesman for National Beef, the No. 4 U.S. beef processor, had no comment regarding its intentions. JBS USA did not return e-mails or phone calls seeking comment.
Chicago Mercantile Exchange live cattle futures surged late on Wednesday as the news broke, and held those gains on Thursday to hit their highest in three months.
Without the added growth benefits of Zilmax, feedlot owners will need to buy even more feed to create the same amount of beef. Retail beef prices are flirting with all-time highs.
"If you take Zilmax out of the equation coupled with the cattle herd at its lowest in 61 years due to last year's drought, it would mean less beef at higher prices to consumers," said Chicago-based Oak Investment Group president Joe Ocrant who also trades cattle futures at the exchange there.
But by Thursday evening prices were driving lower, with October delivery down 0.200 cent per lb at 126.875 after spiking by its 3-cent trading limit earlier in the day.
While Zilmax is considered one of the best weight gain additives, there are alternatives like Optaflexx, which Tyson has not banned, analysts noted.
"While the carcass gains are not as significant as with Zilmax, it is fair to say that cattle weights may not decline as much as some expect today," Steve Meyer, president of Paragon Economics in Des Moines, told clients is a daily newsletter.
"If other packers continue to accept Zilmax-fed cattle, the overall impact ... will be more limited," he wrote.
Zilmax, manufactured by Merck & Co Inc, is the latest in a line of popular "beta agonist" used in the cattle industry to help promote weight gain and leanness in meat.
The additive, which is FDA approved and does not pose a food safety threat, is blended with feed rations and given to cattle in the last few weeks they are in feedlots. While on Zilmax they can gain weight 4 percent more efficiently, adding 20 pounds or more to the average steer before it is shipped to packers for processing, analysts say.
"It increases the overall meat supply, which is critical with cow herd being so small," said Arlan Suderman, analyst with Water Street Solutions, an agricultural advisory firm in Peoria, Illinois.
Its popularity has surged in the past few years as it allowed more lean meat to be produced with less feed, and therefore lower cost, industry sources said. Record high grain prices in recent years has also put pressure on feedlot margins, driving adoption of new ways to enhance growth.
Without using Zilmax or an alternative, achieving an extra 30 pounds of carcass weight would require 240 pounds of feed.
While there is no hard data on how much of the U.S. cattle herd is fed Zilmax, industry experts said it was likely between 20 and 50 percent, and possibly higher.
The impact has been apparent: The average weight of slaughter-ready cattle on a live basis was 1,273 pounds in 2007; by 2012 it had risen nearly 30 pounds or 2 percent to 1,302 lbs, according to U.S. Department of Agriculture data.
"A lot of the growth in carcass weight last year reflects the adoption curve of that product," said David Anderson, an agricultural economist at the Texas A&M Agrilife Extension Service.
But the economic benefits of using Zilmax and some other beta agonist drugs is being diminished by mounting criticism.
Animal welfare advocates have raised the alarm about cattle that may have been unable to handle the stress of the additional weight. Many food companies are increasingly sensitive to public perception of their treatment of animals. Others have complained that Zilmax-fed cattle produces steaks that are less juicy than those raised on grain or forage-based systems.
The issue burst to the fore this week as Tyson Food sent a letter to all feedlot operators saying it would suspend purchases of Zilmax-fed cattle beginning September 6 after some of the animals arrived at its plant lame and had problems moving.
Tyson said it was unsure what caused the problems, but added that some animal health experts suggested a possible link to Zilmax, also called zilpaterol.
"Our evaluation of these problems is ongoing," it said.
WELFARE OR EXPORTS?
Dennis Smith, a broker with Chicago-based Archer Financial Services said plans by Tyson may be motivated more by the lucrative export market. Just over a tenth of all U.S. beef is earmarked for export.
"There is no coincidence that this has came out just after their earnings report with statements about opening up trade more trade with China. This is all about the export market."
China may not specifically ban U.S. meat produced from Zilmax, but not having the feed additive in production would make it easier to export the meat product, said Smith.
If that sounds familiar, it may be because earlier this year Smithfield Foods Inc -- months prior to a $4.7 billion takeover bid from China's Shuanghui International -- started to wind down use of a similar beta agonist, ractopamine, in order to win back access to China's growing market for imported port.
In February, Russia barred U.S. beef, pork and turkey imports because of a dispute over ractopamine. And China has requested third-party verification that U.S. pork is ractopamine free.
(Additional reporting by Tom Polansek and Bob Burgdorfer; Editing by Jonathan Leff and Ed Davies)