Cargill battles drought in cattle country

DALHART, Texas – The giant feedlot Cargill operates near the top of the Texas Panhandle is almost full, 86,000 head of cattle milling about and chewing until they're ready for a trip to the beef factory.

The operation in the heart of cattle country is part of one of Minnetonka-based Cargill's largest U.S. businesses. But the crowded lot of steers and heifers betrays a deeper problem on the arid high plains.

Cargill is set to close another Texas feedlot, and last year it shuttered a mammoth beef packing plant in the state. The problem: not enough cattle to go around, a result of a long and punishing drought.

"This is our third straight year of drought in this area," said Patrick Schwab, general manager of the Dalhart feedlot.

The parched conditions have driven up U.S. retail beef prices and created headaches for big producers like Cargill, which must pay more than usual for cattle.

As drought burned out pasture land, it has led ranchers to reduce the total U.S. cattle herd to its lowest point since 1951. The supply constriction in turn leads to higher cattle prices that work their way up the food chain.

"The packer and the retailer are going to pass that on to consumers," Schwab said.

Ultimately, high cattle prices give ranchers an incentive to expand, and federal data indicates that might be happening. "The profitability is such that where they can expand the herd, they will," said Duane Lenz, general manager at ­CattleFax, a Denver market researcher.

But rebuilding the herd takes a few years due to simple biology. A heifer can have only one calf a year, while a sow can give birth twice annually, delivering a litter of around 10 piglets each time. Plus, the cycle of birth to slaughter for cattle can be up to two years.

So, don't expect any relief soon from record beef prices. "We are going to have continued pressure on retail prices through 2014, 2015 and probably 2016," said Derrell Peel, a livestock marketing specialist at Oklahoma State University.

This is a crucial time of year in the U.S. cattle heartland, of which Texas is the capital. The state had 10.9 million cattle and calves in January; the next closest was Nebraska with 6.2 million, according to the U.S. Department of Agriculture. Minnesota had 2.3 million, ranking 12th among states.

Spring rains are essential to nourish pasture lands. The northern plains, including Nebraska — a big cattle state — have had adequate precipitation. That, too, goes for Minnesota, whose cattle business is dwarfed by giants like Texas but far from negligible.

Forage conditions have improved in Minnesota, and last year's hay shortage has abated. "There is some expansion going on in the state, " said Dar Geiss, a rancher near Pierz and president of the Minnesota State Cattlemen's Association. "The prospects are really good for calves."

But big swaths of Texas and California and parts of Oklahoma are still in "exceptional drought, " as the U.S. Drought Monitor website puts it. Kansas is pretty dry, too.

"We're within a couple of weeks of writing off that area for 2014," Peel said of the Texas Panhandle and western Oklahoma. The dryness was palpable on a recent visit. A biting dust storm turned the sky beige for much of a day.

Giant producers

The nation's biggest beef producers, JBS, Tyson Foods and Cargill, all have big operations in the Panhandle. Those three companies, along with National Beef Packing, account for about 85 percent of U.S. beef production, Peel said.

While privately held Cargill doesn't break out financial data by segment, meat production is one of its most significant U.S. businesses.

The feedlot is an intermediate step between the early part of a beef cow's life — grazing on pasture land — and the last part, a truck ride to a slaughterhouse. At Cargill's Dalhart feedlot, steers stay for about 160 days, arriving about 800 pounds and leaving at 1,350.

Almost 90 percent of the cattle processed at Cargill's four big U.S. beef plants comes from independent feedlots. But Cargill also owns lots, including the one in Dalhart, which covers 500 acres for cattle alone. The Dalhart lot is particularly populated with Black Angus cattle, grist for Cargill's Sterling Silver premium meat line and other products.

Cargill's feedlot in Lockney, south of Amarillo, is slated to close this year, a victim of the cattle crunch. A third Cargill feedlot in the Panhandle will remain open.

At a feedlot, the diet is heavy on corn, from kernels to silage. Corn prices are watched closely. "Everything is based off the price of corn," Cargill's Schwab said.

That price began rising from historical norms around 2007, a few years before the current drought kicked in. High corn prices stressed feedlots and put upward cost pressure on the entire beef industry.

Over the last six months or so — after corn prices fell below $5 a bushel from over $7 in 2012 — feedlots have finally had some relief from red ink. "We've had some short-term profitability in the feedlot industry," Schwab said.

Tough economics

But a feedlot's other main economic variable — low cattle volume — will be a big issue until the herd starts growing. When ranchers liquidate their herds because drought has dried up pasture, they temporarily increase the number of cattle they send to feedlots. But that's only a short-term benefit to feedlots, masking a long-term problem.

The cattle shortfall has been vexing beef processors as well over the past few years. "On the packing side, their margins have really been squeezed," said David Anderson, a livestock specialist at Texas A&M University.

The price of live cattle has often risen faster than the price of boxed beef churned out by packing plants. "The wholesale market didn't increase enough to keep up with fed cattle prices," Anderson said.

The U.S. beef packing industry has had chronic overcapacity for years, and the situation has gotten critical as the cattle supply has dwindled. Cargill was the first to blink in January 2013, when it shut down its Plain­view, Texas, plant.

Big beef plants, where cattle walk in and leave as boxed beef, are labor intensive. Cargill's Plainview plant had about 2,000 workers, making it the town's largest employer. When such plants go down, economic decimation can easily follow.

National Beef is slated to close a plant in Southern California this month, wiping out about 1,300 jobs. More casualties could follow if cattle conditions don't improve.

"I think we are very vulnerable to losing another one or two of these big packing plants," Peel said. "The real problem for packers is that there is just not enough cattle."

Mike Hughlett • 612-673-7003