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The US cattle herd is currently at its thinnest level in eight years, going back to 2015, wiped out by persistent drought conditions throughout the southwest that has led to sustained culling. The cattle population peaked in 2019 but has slipped into an ongoing downtrend in the years since. Along with an apparent inelasticity in the demand for beef – shrugging off large price gains – the cattle herd shrinkage helped to push live cattle futures to an all-time high earlier this month at nearly $1.82 per lb. Front month futures closed near $1.79 last week, up 13.8% the year-to-date period alone.
Widespread cattle culling began in 2020, largely due to supply chain disruptions that emerged in the wake of COVID-19 lockdowns, which shut operations at slaughterhouses and meatpacking plants. Despite those shutdowns, beef futures actually declined to a decade-low due to the perceived economic impact of the pandemic. Once the smoke began to clear and operations in the beef industry were able to ramp up again, ranchers were left to deal with a two-fold problem of weak prices and an inflated herd of live cattle that had built up in the time that slaughterhouses were shuttered. The latter variable faced the industry with the potential for an even deeper and more sustained downturn in pricing, which justified the culling.
Margins continued to be threatened by shortages of available water in key beef cow and crop producing regions throughout the US, which meant culling would have to continue even as prices rose rapidly. Per BLS data, the average price per pound of ground beef rose to a new record-high in May, up 3.6% from the prior month – the largest MoM increase in 19 months – and 25.1% since the start of 2021. That is a much larger increase than observed among prices for all meats, poultry, fish, and eggs in the CPI, which have risen 17.7% over the same period. The availability of water and green pastures continues to be a key consideration for ranchers in the 2023 harvest, and improvements in both of those factors have been sporadic at best.
The US was responsible for almost 22% of the world’s beef production in 2022, the largest share of any single nation, and what happens with the cattle population there is going to reverberate through prices across the globe. Large swathes of the US Midwest have been affected and continue to feel the sting of dryness, struggling with several phases of drought since 2020. Though fairly widespread, with states like Nebraska, Missouri and Kansas, all the way up along the great plains reporting drought conditions, the situation has been particularly severe in places like Texas and Oklahoma recently, the two largest states in the nation by number of beef cattle. Per Wisevoter, Texas and Oklahoma boast 4.5 million and 2.1 million cows, respectively, only slightly less than the cow population of the next four largest states (Missouri, Nebraska, South Dakota, and Kansas) combined.
As recently as March, US Drought Monitor data described more than 80% of Texas as “abnormally dry” or worse, with nearly a fifth of the state falling into the “extreme drought” category. The worst has now passed for most of the state, with less than 2% of the state now experiencing extreme drought, but the majority of Texas’ land remains at least abnormally dry. Cattle-rich east Texas is largely drought-free, but the leading beef-producing counties in the northern high plains, near the Oklahoma panhandle, remain some of the most heavily impacted by ongoing drought. Speaking of Oklahoma, two-thirds of the state is considered abnormally dry or worse, the highest level in three months.
USDA data indicates American pasture and range conditions have improved slightly since last year, but May’s first national look shows just 33% is rated good to excellent while a larger 37% is poor to very poor. Though 26% of Texas’s pasture conditions are rated good to excellent, up 15% from a year ago, that is still below the national average. Conditions have deteriorated significantly in most of the other big states that we’ve mentioned as well. Oklahoma, Missouri, Kansas, and Nebraska have each experienced double-digit percentage declines in pastures considered to be in good to excellent conditions. The one consolation is that the western US, specifically the Arizona, Utah, Nevada and California conglomeration, have seen huge improvements, but their combined cow population is only 1.7 million, equivalent to just one top-5, powerhouse state like Nebraska.
Not only has the number of beef cows in the US continued to diminish, but the slaughter rate has fallen as well, broadly trailing 2022 levels through May. The USDA sees beef production at 27.086 billion lbs in 2023, while next year’s beef production is seen at 24.795 billion lbs – a reduction of almost -2.3 billion lbs. Each of those figures also mark significant declines from record US beef production in 2021, equivalent to 28.360 billion lbs. Though a constrained supply for beef has been widely priced into futures contracts, which are now slightly off record highs, there could be more upside ahead if water supplies and other weather-dependent conditions take another turn for the worse in the summer.
Investors can gain exposure to livestock via the Invesco DB Agriculture Fund (DBA). The iPath Series B Bloomberg Livestock Subindex Total Return ETN (COW) has been a more targeted way for investors to allocate toward cattle prices, but Barclays announced the upcoming delisting of the fund on June 7.
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