Cattle Futures Reach Record Highs Amid Drought Conditions in Southern US
The Drought’s Impact on Cattle Supply
Cattle futures have surged to a historic high due to drought conditions in the southwestern United States. The dry spell has ravaged the animals’ feeding areas, contributing to a decline in the size of the domestic cattle herd to its smallest in eight years. Widespread crop failures and a lack of water for grazing were particularly hard on prime cattle breeding operations across Texas, Oklahoma, Kansas, and Nebraska. This led to a gradual reduction of female animals over the last 18 months.
Shrinking Livestock Supplies
According to the U.S. Department of Agriculture’s biannual Cattle report, the American cattle and calves inventory stood at 89.3 million head as of January 1, 2022, down 3% from the same time the previous year. The drought in the Southern Plains resulted in less grass for the cattle to feed on. This shortage has led to a decrease in cattle supply nationwide, causing record-high prices for feeder cattle and live cattle.
The Impact of Feeder Cattle Prices on Live Cattle
Prices for feeder cattle, which are used for the feedlot market, and live cattle, which have reached the slaughter weight in feedlots, hit all-time highs on Wednesday, according to FactSet data. The record-breaking prices of feeder cattle translate to higher live cattle prices, meaning that consumers may expect to pay more for beef products.
August live cattle closed Wednesday at an unprecedented 175.5 cents per pound, an 11% increase year-to-date. Tighter supplies and strong demand for beef were attributed to high consumer beef demand, catching futures market participants off-guard. The cash market for fed cattle, also referred to as live cattle, has rallied from late March into early April and reached all-time highs of $182 per hundredweight (cwt.).
Feed Costs and Retail Prices
Meanwhile, the supply of corn, a key feed input for cattle in states like Texas, Kansas, and Nebraska, is limited, and input costs are high. Feed prices remain elevated since the western drought persists. Corn prices are likely to stay high until the drought retreats, supporting upward pressure on live cattle values, according to a senior commodities strategist at HTS Commodities.
Consumer beef prices have remained steady to lower since their record high during the COVID-19 pandemic in October 2021. While retail prices have fallen somewhat from those peaks, the higher underlying cattle market values and stronger wholesale beef prices support forecasts of future price rises. Rabobank expects retail meat prices to trend higher throughout summer and fall due to tightening supplies and higher cattle costs.
The End of the Drought?
Cattle breeders will want to retain female animals for breeding as moisture finally enters states affected by the drought. However, that scenario will shrink the supply of feeder cattle, further pushing live and feeder cattle prices higher. On the other hand, feed costs have softened due to more abundant crops in South America and the expected larger harvests in the US this fall. However, it will require better weather before crops improve.
Conclusion
Despite economic headwinds, U.S. consumers still view beef products as an expense worth paying for, as they are still generally affordable overall. On average, U.S. consumers can provide a single serving of beef for each family member for around 15 minutes of work.