CHICAGO-(Dow Jones)--Cattle prices rose to a record as a drought in the southern Plains is beginning to bear down on the nation's beef supplies.
Faced with the worst drought since the Dust Bowl in the 1930s, ranchers in states such as Texas and Oklahoma culled their herds last year because they couldn't afford to buy feed and water to replace the parched grass and dry ponds. They sold young cattle to feedlots, where the animals are fattened before they are slaughtered and butchered.
The ripple effects of those decisions are now being felt in the cattle market, as those sales are beginning to slow. The U.S. Department of Agriculture on Friday reported that 1.68 million head of cattle were sold to feedlots in December, a 6 percent drop from the previous year.
Traders anticipating this kind of decline sent cattle prices rallying to a record before the data were released. Live-cattle futures rallied as high as $1.261 a pound on the Chicago Mercantile Exchange before trimming some gains to finish at $1.246 a pound, up 0.35 cent, or 0.3 percent, on Friday. Cattle prices have surged 15 percent over the past year, even as prices of other commodities have stumbled, with the Dow Jones-UBS Commodity Index down 13 percent.
"There just aren't enough cattle to go around," said John Roberts, director of marketing at Nebraska Cattlemen, an industry group.
Meat eaters already are seeing higher costs, with the retail price of beef rising faster than any other major U.S. food category in 2011, up about 10 percent, according to U.S. Department of Agriculture estimates. The agency expects price increases to moderate this year to 4.5 percent.
Beef prices are soaring in part because the cattle industry's cost of production has risen while the price of cattle hasn't kept pace with that increase, leaving many producers little incentive to expand production. The price of corn, the critical feed for cattle, more than doubled last year and is up 66 percent over the past two years, while hay costs also have skyrocketed.
"Cattle prices will have to go higher for ranchers to be profitable and expand," said David C. Nelson, global strategist at Rabobank, a U.S. agricultural lender based in the Netherlands.
Smaller feedlot numbers tend to mean tighter wholesale beef supplies in four months to six months from now. Concerns of tighter supplies already are showing up in markets where meatpackers buy live animals. Beef processors paid higher prices this week on expectations supplies are only going to get tighter this spring.
Stronger global demand also has contributed to the rally. People in developing nations, particularly in Asia, are boosting protein consumption. U.S. beef exports rose 23 percent in the first 11 months of 2011 compared with 2010. But while demand for U.S. exports is strong, competition is increasing. Canada said on Friday that beef from some of its cattle is no longer banned by South Korea, which instituted restrictions nine years ago.
To be sure, any significant pullback in demand could undermine prices. And some analysts caution that a record-breaking rally is difficult to sustain at this time of year, after the holidays end but before grilling season begins. "We're seeing a structural disconnect between supply and demand," USDA economist Richard Volpe said. "Inventories are really tight even though demand is strong."
The drought in the southern Plains has hit the heartland of the U.S. beef industry. Texas, Oklahoma and New Mexico have felt it the worst. But other states such as Kansas and Missouri have suffered as well.
Ranchers responded by reducing the size of their herds and keeping fewer heifers for breeding. That means the beginning of the supply chain for beef has shrunk, and rebuilding supplies will take well over a year.
