Drought Withers Smallest Hay Crop in Century to Boost Beef Costs

The smallest U.S. hay crop in more than a century is withering under a record Texas drought, boosting the cost of livestock feed for dairy farmers and beef producers from California to Maryland.

The price of alfalfa, the most common hay variety, surged 51 percent in the past year, reaching a record $186 a short ton in May, government data show. Hay and grass make up about half of what cattle eat over their lifetimes, so parched pastures are forcing ranchers to find alternative sources of feed, pushing some spot-market corn to the highest ever.

Farmers in Oklahoma and in Texas, the biggest producer of hay and cattle, may harvest only one crop from alfalfa and Bermuda grass this year, compared with three normally, said Larry Redmon, a state forage specialist at Texas A&M University. Cattle that usually graze on fields through September or October are instead being sold to feedlots, where they are confined in pens and eat mostly corn.

“We’re just running out of grass,” Bo Kizziar, the feedlot manager at Hansford County Feeders, said by telephone from Spearman, Texas. With pastures disappearing, Hansford is moving cattle into its 50,000-head feedlot three months earlier than normal, boosting costs as the company buys more corn, he said.

The drought, which is the worst ever in Texas, is compounding a hay shortage caused by farmers shifting this year to more profitable crops, including corn. The U.S. may harvest 57.605 million acres of hay in 2011, the least on records going back to 1909, U.S. Department of Agriculture data show. Corn was sown on 92.282 million acres, the second-most since 1944.

Ethanol Corn Grab

Surging demand from ethanol refiners, livestock producers and importers sent corn futures up 75 percent in the past year, as of yesterday. The U.S. is the world’s largest corn grower and exporter, and the government said June 9 that, for the first time ever, more of the crop will be used to make fuel than animal feed.

Jeff Oyen, 47, who has run a hay-brokerage business since 1991, converted all 1,000 acres of his farm near Crook, South Dakota, to other crops the past three years, partly because corn, wheat and soybeans offered better returns than hay.

Oyen still trucks about 10,000 bales of hay that he buys from other farmers in central South Dakota to feedlots and dairies in Iowa, Minnesota and Wisconsin. Oyen said he has shipped some hay as far as Maryland because adverse weather reduced production.

“We are getting lots of calls to buy hay, but we can only service so many customers,” said Oyen, who is selling hay this year for $160 a ton, up from about $100 a year earlier and the most ever at this time of year.

Record Hay Prices

Alfalfa traded at a national average of $180 a ton in June, compared with $119 a year earlier, according to USDA figures. For the year, the average may be more than $165, topping the previous annual peak in 2008, said Katelyn McCullock, a dairy and forage economist at the Denver-based Livestock Marketing Information Center, a forecaster since 1955.

Rising feed costs are prompting a reduction in cattle herds and eroding profit for milk producers. The USDA yesterday forecast retail-meat prices may increase this year as much as 7 percent and dairy products may jump 6 percent, more than the rate of overall food inflation at 3 percent to 4 percent.

“All feed costs are high,” McCullock said. “Rising alfalfa prices will hit dairy farmers’ profitability fairly quickly, and this will lead to increased culling.” In June, the U.S. cow herd was the highest in two years, USDA data show.

Shift to Corn

As cattle producers shift more of their feed rations to grain, regional spot-market prices are climbing. Corn in the northern Texas Panhandle sold for about $6.89 a bushel on July 21, or 9.5 cents above September corn futures on the Chicago Board of Trade. The spot price was almost twice as high as the same day a year earlier, USDA data show. Some livestock producers in Texas are paying as much as $1.15 more than futures, according to Kizziar, the feedlot manager.

Parts of Texas, New Mexico, Arizona, Southern California and western Oklahoma had as little as 25 percent of normal rainfall in the past 90 days, while areas of Kansas, Louisiana, Mississippi, Alabama, Georgia, Florida and the Carolinas had about half, National Weather Service data show.

In Texas, wildfires have burned about 3.3 million acres this year, said Holly Huffman, a spokeswoman for the state Forest Service. October through June was the driest nine-month period ever in Texas, and rainfall totals in July look to extend the record into a 10th month, State Climatologist John Nielsen- Gammon said in an interview from College Station.

Grinding Stalks

The drought also will hurt local corn production. Some farmers in central Texas are already cutting crops that have failed and grinding the stalks into silage to feed cattle, Texas A&M’s Redmon said.

“It’s just a dang disaster everywhere you look,” Redmon said. “I haven’t even seen a corn crop this year, unless it’s being irrigated. Those guys just got hammered.”

Lower grain and hay supplies may support corn prices nationally, as southern livestock producers “are going to have to come back to the Midwest for those bushels,” said David Smoldt, vice president of operations at INTL FCStone in West Des Moines, Iowa. U.S. rail shipments of grain during the four weeks ended July 9 were 5 percent higher than a year earlier, USDA data show.

U.S. corn inventories before next year’s harvest may drop to 870 million bushels, the lowest since 1996, as ethanol producers demand record amounts of the grain and livestock demand increases, according to the USDA.

Corn Record Seen

The tightening stockpile “really puts the pressure on Illinois, Iowa, Minnesota and Nebraska to have better than a normal crop,” said Smoldt, who estimates corn might reach a record $8 if hot, dry Midwest weather continues into August when plants fill kernels with sugars and starch.

The U.S. cattle herd, including dairy cows and beef animals on feedlots and ranches, totaled 100 million head as of July 1, the fewest at that time of year since at least 1973, the USDA said July 22.

As of July 1, the U.S. feedlot herd of beef cattle totaled 10.451 million head, up 3.8 percent from a year earlier, the USDA said in a report July 22, as drought forced ranchers to sell more livestock.

Beef producers are culling cows and young females, which means smaller supplies for the next two years or longer, according to Steve Kay, the publisher of Cattle Buyers Weekly, a trade magazine based in Petaluma, California. The cattle and calf herd next year may fall to the lowest since 1952, increasing costs for meat processors including Tyson Foods Inc. and Cargill Inc., he said.

Smaller Herds

“The drought has dried up any hopes for rebuilding the beef herd this year or next year,” Kay said in a telephone interview. “Hay is getting shorter in supply and prices are running higher. The herd liquidation is increasing. The falling cattle herd is going to put more stress on the cattle-processing industry. Beef is going to continue to be more expensive for U.S. consumers.”

Feedlots also are accelerating sales to meatpackers, which will ultimately result in lower beef supplies and may send cattle to a record by the fourth quarter, said Don Close, a market director with the Texas Cattle Feeders Association in Amarillo. Cattle futures reached $1.21625 a pound on April 4 on the Chicago Mercantile Exchange, the highest ever, before retreating to $1.149 yesterday.

“Sale-barn receipts for cows and calves have been extremely heavy because guys are out of feed or out of water and don’t have a choice but to sell their cattle,” Close said. “It’s going to make a tight supply even tighter, as we get down the road.”

Dairy Output Boom

Still, demand remains high for both corn and hay from dairy farms, which are expanding herds as high milk prices offset the jump in feed costs. Average Class I milk prices surged 79 percent to $23.92 in June from two years earlier. U.S. milk production climbed 1.1 in June, while the dairy herd totaled 9.21 million cows, up 0.9 percent from a year earlier, the USDA said July 19.

“When you look at the projected prices for corn, soybeans and hay and the price of milk, the profit margin over feed costs is very slim,” said Steve Bodart, a dairy-industry specialist at Lookout Ridge Consulting in Baldwin, Wisconsin. “We are going to have very tight supplies of hay this winter, and that’s when cow culling will increase.”

Poor Crop Conditions

About 94 percent of pasture in Texas was in poor or very poor condition as of July 17, the worst shape for the date since at least 1995, according to the USDA. Little rain is in the forecast over the next five days, and temperatures in Dallas will top 100 degrees Fahrenheit (38 degrees Celsius) for a 25th consecutive day today, according to the National Weather Service.

“Our pasture conditions are terrible,” said George Enloe, a partner at Amarillo Brokerage Co., a risk-management firm in Amarillo, Texas. “It looks like the moon. It looks like it’s the middle of the winter in a real bad year, except it’s 100 degrees outside.”

To contact the reporters on this story: Whitney McFerron in Chicago at wmcferron1@bloomberg.net; Jeff Wilson in Chicago at jwilson29@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.