The U.S. cattle herd has shrunk for the fifth straight year to a 60-year low, a government report showed on Friday, as a devastating drought and record high feed costs hit production, which will likely mean even higher beef prices for consumers.
One of the worst droughts since the Dust Bowl days in the 1930s plagued the top cattle state of Texas for more than a year. In addition cattle producers there and in other states faced high feed costs as corn prices in June soared to a record of almost $8 per bushel (all prices US$).
Stiff competition with crop farmers for land also played a role in shrinking the herd.
The U.S. Agriculture Department report showed the cattle herd at 90.77 million head as of Jan. 1, down 2.07 per cent from a year earlier and the biggest percentage decline since 1989.
That also was a deeper cut than what analysts expected. A Reuters poll showed analysts, on average, expected 91.26 million head.
The decline should extend the rally in live cattle futures at the Chicago Mercantile Exchange, analysts said. CME live cattle futures rose to a record high of 126.375 cents per pound on Wednesday and are up about 18 per cent from a year ago.
"The big drop in calves weighing under 500 lbs. and the big drop in cow population is going to give the report a generally a bullish tone," said analyst Dan Vaught of Vaught Futures Insight in Altus, Ark.
Fewer calves and breeding cows means fewer animals to rebuild the herd.
"I would say we should have two more years of smaller cattle inventories," said Ron Plain, University of Missouri livestock economist.
Beef companies tested
Meat packing companies such as Tyson Foods and the U.S. operations of Brazil-based JBS are going to have to scramble for cattle.
"The first thing they should be shaking their heads about is there are not enough cattle to keep all the beef packers in the beef business," Plain said of the meat companies.
Beef prices at the retail level have surged, setting record highs for four straight months late last year and more increases are coming.
USDA forecast total beef production this year at 25.075 billion lbs., down 4.6 per cent from 26.297 billion in 2011.
Also rallying the prices have been strong beef exports, which in 2011 for the first time topped the record high set in 2003, right before the first U.S. case of BSE shut down exports.
Texas herd down
The drought, stretching nearly all of last year in the southern Plains, decimated pastures and forced ranchers to cull their herd and send young cattle to feedlots for fattening two to three months earlier than usual.
Texas, the largest cattle state, was hardest hit, with its herd down 11 per cent from a year ago at 11.9 million head as of Jan 1. While Texas still has the most cattle, its margin is shrinking, as cattle in pasture-rich Nebraska jumped four per cent from a year ago.
Nebraska replaced Kansas, which also was hit hard by the drought, as the No. 2 cattle state.
The cattle herd peaked at 132 million head in 1975, according to USDA data, but there has not been a corresponding decline in beef production due to cattle getting larger over the years through genetics and animal husbandry.
For instance, the cattle herd declined by 22 million head, or 17 per cent, from 1975 to 1985, while beef production fell just 0.5 per cent then.
Beef processors, on average, had losses of about $98 per head on Friday due to the high cost of cattle, according to Hedgersedge.com LLC, an agribusiness risk management and market research firm. That date indicates processors have been losing money since mid-September.
As a result processors are scaling back cattle slaughter. They also are passing the higher costs onto consumers, which could drive down demand for beef.
"When cattle prices shoot up you raise the price of your finished product. In doing so, you run the risk of people turning away from beef, and some of that has happened, at least domestically," said a source at a meat packer.
"The consensus in the industry is that packers are losing money, and it’s going to take longer to pull out of this hole than most people thought. We’ve cut back some (slaughter), but not to the point of taking off days."
— Additional reporting for Reuters by Sam Nelson and Michael Hirtzer.