Feb. 10 (Bloomberg) -- Record-high U.S. beef prices offer little comfort to California rancher Kevin Kester, whose family has been raising cattle since 1867. He’s just trying to avoid losing his herd to the state’s worst drought ever.
The dry spell withered pastures on Kester’s 22,000-acre ranch near Paso Robles, 175 miles (282 kilometers) north of Los Angeles, forcing him to sell 20 percent of his cows to avoid extra hay-feeding costs. He hasn’t added young cattle at a time of year when he usually buys several thousand. Without rain in the next 60 to 90 days, Kester said he’ll sell all his cows.
“Purchasing hay is unsustainable financially,” Kester, 58, said on Feb. 6 at an industry conference in Nashville, Tennessee. “Neighbors and friends in our part of the state are selling most or all of their cows because they don’t have any other options. Unfortunately, there will be way too many of them that end up going out of business permanently.”
The drought is forcing California ranchers, who raise 2 percent of nation’s beef cattle, to cut their herds just as researcher CattleFax says some producers elsewhere in the U.S. 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, signaling an increase in meat costs for consumers.
Cattle futures climbed 4.3 percent this year and touched $1.432 a pound on Jan. 22, the highest since trading began on the Chicago Mercantile Exchange in 1964. Wholesale beef reached a record $2.4005 a pound on Jan. 22, and prices on average this year are 14 percent higher than 2013. The Standard & Poor’s GSCI Spot Index of 24 commodities rose 0.4 percent since Dec. 31, the MSCI All-Country World Index of equities slid 3.3 percent, and the Bloomberg Treasury Bond Index rose 1.6 percent.
About 90 percent of California, the nation’s biggest agricultural producer, is in severe drought, according to the U.S. 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, including avocados, strawberries and almonds. 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 $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 Jan. 31 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 $3.3 billion of revenue in 2012, government data show.
‘Worst in Memory’
“Without a doubt, this is the worst in my memory,” said Tim Koopmann, 61, a fourth-generation rancher who is president of the California Cattlemen’s Association. “It’s not just producers on the front lines that are going to be impacted. It’s all those employees and those jobs that are associated with support services that are going to be impacted.”
Koopmann, whose family has been raising cattle since 1918, said he normally has about 200 mother cows on almost 3,000 acres in Sunol, about 20 miles northeast of San Jose. That herd has been cut by 40 percent and he increased spending on feed by about $25,000 since November.
“Beef production in the state is probably going to be reduced considerably,” he said.
California’s beef-cow herd was at 600,000 head as of Jan. 1, down 1.6 percent from a year earlier, the U.S. Department of Agriculture data show. The total U.S. cattle herd totaled 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 Jan. 1 rose 1.7 percent 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 kilograms).
Only 21 percent of the contiguous U.S. 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 13.925 billion bushels in the U.S. last year, which has since the price of the grain down 48 percent from an all-time high in August 2012.
Lower feed costs helped return cow-calf producers to profitability, and some may earn a record $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 $1.35 a pound this year, up 7 percent, and spot prices for a 750-pound steer may jump 13 percent on average to $1.675 a pound, CattleFax predicted.
Missing out on profits at a time of record prices is “extremely frustrating” for California’s cattle producers, said Kester, the Paso Robles rancher. When U.S. ranchers are hit with drought, their costs can easily rise by $200 to $300 a head, CattleFax’s Blach said.
The one “silver lining” is that cattle producers forced to sell are getting high prices, said Tammie McElroy, a second-generation rancher in Gridley, California, who has fewer than 100 head of breeding cows.
McElroy, 51, said her father faced a similar challenge during the drought of 1977, when she was a freshman in high school.
“I remember my father sitting at my kitchen table, with his head in his hands, just devastated because he had to make an important decision,” McElroy said as her eyes filled with tears during an interview at a cattle convention in Nashville. “He ended up selling half of our cow herd. That’s going to have to be an option for us unless we get some relief.”
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