Drought shrinks cattle herds, leads to market rally

Bloomberg NewsFebruary 15, 2013 

— Bill Donald, the third-generation owner of Cayuse Livestock, sold the calves he raised early last summer and cut purchases of cattle after pastures dried up. The herd grazing his land now is about 85 percent of normal.

“There’s a huge cattle country that is in need of quite a bit of moisture,” Donald, 60, the former president of the National Cattlemen’s Beef Association, said by phone from his ranch near Melville, Mont. “It’s going to take a major change in the weather patterns.”

The worst U.S. drought since the 1930s is shrinking a cattle herd that’s already the smallest since 1952 and signaling tighter beef supplies and higher costs for restaurant owners. Chipotle Mexican Grill says the burrito chain may have to raise prices, while government data show a pound of boneless sirloin steak cost consumers $6.781 on average in December, 10 percent more than a year earlier.

Domestic beef output will drop to an eight-year low in 2013, and per-capita supplies will be the smallest since at least 1970, the U.S. Department of Agriculture estimates. Cattle futures in Chicago may rally to a record $1.3925 a pound this year.

The herd declined for a sixth straight year as of Jan. 1 to 89.3 million head, the government reported Feb. 1. Even as retail-beef prices jumped to a record in November, the shortage of cattle in Texas forced the shutdown of a plant run by Cargill, one of the three largest U.S. processors.

“This year and next year, there’s no way around smaller production,” said Randy Blach, the chief executive officer of CattleFax, an industry researcher in Centennial, Colo. “We’ll have record-high average prices for 2013. We’ll see that on retail, wholesale and at the fed-cattle level.”

More than 56 percent of the contiguous United States was in drought as of the week ended Feb. 5, compared with 38 percent a year earlier, according to the U.S. Drought Monitor. The odds are against the dry spell ending soon, said John Nielsen-Gammon, a state climatologist and a professor at Texas A&M University.

Market trends telling

Other agricultural commodities reflect expectations that the weather may be improving. Corn, wheat and soy are all retreating on speculation of more rainfall. Corn has dropped 18 percent from an all-time high of $8.49 a bushel on Aug. 10.

Cattle in the United States are raised from birth on pastures for about a year, when they weigh 500 pounds (227 kilograms) to 800 pounds, and then are sold to feedlots. There, the animals consume mostly corn until they are 1,200 pounds to 1,350 pounds and are sold to slaughtering plants.

It may take years to rebuild the herd, said Donald, the Montana ranch owner.

“The market has given us a strong economic signal, but if you don’t have grass, you just can’t do it,” said Donald, who keeps the calves of his 1,500 cows and buys an additional 2,000 to 3,000 stocker cattle a year that graze on his pastures until they are big enough to be sold.

With beef prices approaching records, supermarket shoppers are buying less-expensive cuts of meat, said John Lundeen, a senior executive director of market research for the National Cattlemen’s Beef Association. Reduced demand means any rally in cattle may not last.

Wholesale pork fetched 79.96 cents a pound this week, compared with $1.8368 for beef, USDA data show. Wholesale chicken breasts at Georgia docks sold for $1.61 a pound, government data show. U.S. demand for wholesale beef may drop 2 percent this year, according to CattleFax.

Long road to recovery

“Clearly, beef has gone up much faster than its competitors,” Michael Swanson, an agricultural economist at Wells Fargo, said during a presentation at an industry conference in Tampa, Fla., last week. “If you rise at an above-average rate in a flat real-wage-rate environment, you’re going to see the most pressure from demand.”

Even with a smaller herd, livestock sales will grow 2.8 percent to a record $176.5 billion this year, the USDA said in a report on Feb. 11. Parts of the U.S. may see more normal precipitation in the spring and summer growing season, according to Art Douglas, meteorologist at Creighton University in Omaha, Neb.

While the weather may improve, it takes about 30 months to boost beef production, CattleFax’s Blach said. Calves have a nine-month gestation and take about 20 months to reach slaughter weight. “I’ve never seen the herd decrease this much in my lifetime,” said Joe Leathers, 55, general manager of 6666 Ranch in Guthrie, Texas. “The cattle prices will be good because of the low numbers to come for years to come.”

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