Farmers in the U.S. are facing a costly drought and scorching inflation, leading to remarkably high levels of cattle liquidation. These shrinking cattle herds are likely to affect the cost of beef for years to come, according to economists and experts.
"Beef cow slaughter has been running over 80,000 head a week," Texas A&M Livestock Marketing Specialist David Anderson said regarding the cattle market in his state. "We've had several weeks in a row over that level, and that's the biggest cow slaughter in a decade."
One of the driving forces behind the liquidation has been the rising cost of feed: when raising cattle, keeping the animals fed is the most costly part. Corn futures hit a ten-year high in April following the Russian invasion of Ukraine, a major producer.
While corn futures have since seen a 26% drop in price, that reduced cost still isn't likely to affect beef prices anytime soon thanks to inflation in other areas of cattle production. Fuel prices are still at record-high levels in some places, raising shipping costs on feed by as much as 40% compared to last year.
"There's really a lot of distance between the price of those grains and the price of those products at the meat counter," American Farm Bureau Federation economist Bernt Nelson said.
Even with that dip, corn futures are still 9% higher than this time last year. Ground beef prices, meanwhile, are up 10% year-over-year. Despite rising prices, demand for beef is still high, according to Tyson Foods (NYSE: TSN).
"Even though we may be seeing some relief in feed prices, that demand is going to hold (beef) prices where they're at," said economist Lee Schulz at Iowa State University.
While the increased liquidation of cattle will likely boost margins for meatpackers like Tyson temporarily, those margins are expected to decline over the course of the year, from 12.7% in the first quarter to as little as 5% by the end of the year, according to the food company.
It might seem like more cattle being sold to meatpackers would lead to more beef being on the market, but the truth is that boost will be short-lived. In the coming years, farmers will be faced with meeting demand with their depleted heards. However, once that shortage takes hold, farmers who manage to keep their herds could benefit from massive spikes in beef prices. In 2011, a similar drought caused $3.23 billion in losses for the livestock industry, but the price of cattle hit record highs afterward.
"The beef cattle market isn't something that turns on a dime," Anderson said. "It takes time. Cattle are a long-term cycle, and I suspect this will all play out similarly to the years following the 2011 drought."
Currently, the number of replacement heifers, cows who will have calves in the future, is at record lows, and Tyson's president of fresh meats, Shane Miller, said on an investor call that herds are going to continue shrinking for some time due to the drought.
"It's clearly bad out there based on the number of culls we've seen," says Anderson. "Drought is forcing the issue. Whether it is zero grazing, low forage stocks, high feed and hay prices, or running low on water, Texas ranchers are facing tough decisions right now."
"If there is any way to keep young cows and hold on to some replacement heifers, we're going to see record-high calf prices," he continued. "I think that's an opportunity, but that's also easier said than done."