February 11, 2014

California ranchers to cut herds due to severe drought

California ranchers, who raise 2% of US' beef cattle, are forced to cut their herds due to drought, as researcher CattleFax says some producers elsewhere in the US are starting to expand as profit heads to a record.

Average cattle and beef prices that surged to records in the past year will reach new highs in 2014, according to researcher Global AgriTrends, signalling an increase in meat costs for consumers. Cattle futures climbed 4.3% this year and touched US$1.432 a pound on January 22, the highest since trading began on the Chicago Mercantile Exchange in 1964. Wholesale beef reached a record US$2.4005 a pound on January 22, and prices on average this year are 14% higher than 2013. The Standard & Poor's GSCI Spot Index of 24 commodities rose 0.4% since December 31, the MSCI All-Country World Index of equities slid 3.3%, and the Bloomberg Treasury Bond Index rose 1.6%.

About 90% of California, the nation's biggest agricultural producer, is in severe drought, according to the US Drought Monitor. The lack of water is affecting everything from milk, beef and wine to some of the nation's largest fruit and vegetable crops. Farmers in the fertile central valley region are being forced to leave thousands of acres of fields fallow.

The state could suffer as much as US$5 billion in drought- related revenue losses from farming and related businesses, according to estimates by the California Farm Water Coalition, an industry group. For the first time in state history, water officials said that they won't be able to make deliveries to contractors who supply two-thirds of the population and 750,000 acres of farmland. The cattle industry is the fifth-largest in California agriculture with US$3.3 billion of revenue in 2012, government data show.

California's beef-cow herd was at 600,000 head as of January 1, down 1.6% from a year earlier, the USDA data show. The total US cattle herd totalled 87.7 million head, the lowest since 1951, marking the seventh straight year of contraction because of high feed costs and recurring droughts in Texas, the largest producer.

Slumping supplies of animals to slaughter forced Leucadia National Corp. to announce plans last month to close its Brawley, California, beef plant, which employs 1,300. Cargill Inc. closed a Texas processing plant in February 2013. One to three additional packing plants may need to close in the next 12 to 24 months, Kevin Good, a market analyst at CattleFax, said during a presentation at the Nashville conference.

There are signs that ranchers are expanding outside of California as conditions improve. The number of young beef-cows held for breeding on January 1 rose 1.7% from a year earlier to 5.5 million head, USDA data show. Calves have nine-month gestation periods and can take 22 months to reach slaughter weight of about 1,200 pounds (544 kilogrammes).

Only 21% of the contiguous US is in "severe drought," or about half what it was a year ago, drought monitor data show. Production of corn, the main ingredient in livestock feed, surged to a record 354 million tonnes in the US last year, which has since the price of the grain down 48% from an all-time high in August 2012.

Lower feed costs helped return cow-calf producers to profitability, and some may earn a record US$300 a head this year, said Randy Blach, the chief executive officer of Centennial, Colorado-based CattleFax. The cash price of fed cattle may average US$1.35 a pound this year, up 7%, and spot prices for a 750-pound steer may jump 13% on average to US$1.675 a pound, CattleFax predicted.