Cattle herds shrink as drought dries up pastures, drives up corn prices

The worst U.S. drought in a half century and record feed prices are spurring farmers to shrink cattle herds to the smallest in two generations, driving beef prices higher.

Beef output will slump to a nine-year low in 2013 after drought damaged pastures from Missouri to Montana, the U.S. Department of Agriculture estimates. The domestic herd is now the smallest since at least 1973, and retail prices reached a record last month, USDA data show. Cattle futures may rise 8.5 percent to an all-time high of $1.35 a pound in Chicago in the next 12 months, said Rich Nelson, the chief strategist at Allendale Inc. who has tracked the market for 15 years.

Feedlots are losing $300 a head this month fattening cattle for slaughter, after corn surged 64 percent since June 15, University of Missouri data show. JBS, the largest beef producer, fast-food chain Wendy’s Co. and Red Robin Gourmet Burgers are among those planning price increases. The USDA expects food inflation of as much as 4 percent in 2013, compared with an average of 3 percent since 2004. A United Nations gauge of global food costs jumped 6.2 percent in July.

“We’ve had a huge liquidation off of pastures,” said Walt Hackney, 74, who buys and sells 250,000 cattle a year in Omaha, Neb., and has worked in the livestock business for about a half century. “It’s all due to the drought. There’s no grass for them to graze on.”

After rising 11 percent since late April, cattle are now 2.4 percent higher for the year at $1.244. The Standard & Poor’s GSCI Agriculture Index of eight commodities advanced 20 percent since the start of January, and the MSCI All-Country World Index of equities added 8.8 percent. Treasuries returned 1.8 percent, a Bank of America Corp. Index shows.

Beef output in the United States, the world’s largest producer, will drop 3.9 percent to 24.575 billion pounds next year, the lowest since 2004, the USDA estimates. The domestic herd across ranches, feedlots and dairies dropped to 97.8 million head on July 1, the smallest for the date in at least 39 years, the latest data show.

Cattle spend 12 to 18 months eating grass before they are sent to feedlots, where they consume mostly corn for five months until they are fat enough for slaughter. The drought has left pastures in the worst condition since at least 1995, with 59 percent rated poor or very poor on Aug. 19, the government estimates.