Texas rancher Jim Selman is on the verge of going out of the cattle business, a victim of one of the worst droughts since the dust bowl in the 1930s.
The 300-cow herd on his 3,000-acre ranch in Gonzales county has dwindled to a mere seven animals, as the verdant pastures turned into dried-up brush and hay prices went through the roof.
Scenes like this have become the hallmark of the once robust ranching community in Texas, the cradle of the cattle industry, and to a lesser extent in states like Oklahoma and Kansas.
Fears that the U.S. will “run out of cattle” and suffer from a shortage in beef supplies have lit a fire under the live cattle futures market.
Futures have surged 40 per cent over the past five years, peaking at a record 126.075 cents per pound last week. They are up 15 per cent in the past year.
“I will not be terribly surprised if prices head even higher,” said Arkansas livestock analyst Dan Vaught.
However, prices will first likely retreat during the winter and spring when supplies typically rise, he said. Poor margins for packers are also discouraging them from buying.
Beef packers are, generally, swimming in red ink because the price of beef has not kept pace and some estimate they are losing about $100 for each head of cattle processed.
Packers have been buying cattle despite running heavy losses because they needed to meet previously signed contracts and protect market share.
Drought ignites markets
A historic southern Plains drought that has lasted about a year is at the heart of the price rally, as the absence of pasture forced ranchers to liquidate their herd or send them to feedlots at an accelerated pace.
The lack of pasture, coupled with a surge in corn prices, which hit a record high near $8 per bushel in June last year, forced some ranchers to send underweight cattle to feedlots, shrinking the supply of calves.
That saw feeder cattle futures set multiple record highs in January as feedlots scrambled to secure supplies.
“As far as cattle go, because so many of them were brought in because of the drought there isn’t a lot to choose from now,” said trading adviser Joe Ocrant.
“Also, a lot of the cattle that are coming out of feedlots now are lighter-weight cattle, which means we’re getting less beef from them.”
Strong beef exports to countries such as South Korea and Japan have also been driving prices for cattle higher.