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* US cattle herd smallest in 60 years
* Drought, high feed costs forced herd liquidation
* Cargill's action lifts shares of rival Tyson-analyst
By Theopolis Waters and Christine Stebbins
CHICAGO, Jan 17 (Reuters) - U.S. agribusiness giant Cargill Inc, and one of the nation's largest beef processors, said on Thursday it will close its Plainview, Texas, beef plant on Feb. 1 in reaction to the smallest U.S. cattle supply in more than 60 years.
"The U.S. cattle herd is at its lowest level since 1952. Increased feed costs resulting from the prolonged drought, combined with herd liquidations by cattle ranchers, are severely and adversely contributing to the challenging business conditions we face as an industry," John Keating, president of Cargill Beef, said in a statement.
The company also cited an over capacity in beef processing in the Texas Panhandle, where Cargill operates two of the four beef processing plants there.
Shares of rival beef producer Tyson Foods Inc rose on Thursday as one less beef plant should benefit the industry.
"Industry capacity utilization rates in beef packing have been deteriorating in recent years thanks to fewer available cattle. With a big plant out of commission, capacity utilization rates should rise and packers should gain some leverage," JP Morgan analyst Ken Goldman said in an email.
The U.S. cattle as of January 1, 2012, was 90.8 million head, down 2 percent from 2011, and the smallest since 88.1 million in 1952. USDA will release its U.S. cattle herd size as of January 1, 2013, on February 1.
Meat industry analysts and economists have speculated for months that the smaller cattle herd, due to three years of severe dryness in top cattle states of Texas and Oklahoma, would force at least one packing plant to close this year.
Cattle previously sent to the Plainview plant, which processes about 4,500 head per day, will be diverted to Cargill's beef plants in at Friona, Texas; Dodge City, Kansas, and Fort Morgan, Colorado.
"That will more consistently provide a 40-hour paycheck for 15,000 people in our beef business. We intend to maintain our position in the marketplace," Cargill spokesman Michael Martin said in response to an e-mail request.
The company's regional beef facilities at Fresno, California; Milwaukee, Wisconsin; and Wyalusing, Pennsylvania, as well as its beef plant in Schuyler, Nebraska, and two beef plants in Canada are not affected, Cargill said.
"We are retaining the Plainview plant and property with the hope that someday there will be a need for additional processing capacity in the region, but we do not foresee that happening for a number of years," Martin said in the statement.
Cargill plans to layoff some of the plant's 2,000 employees with others filling positions at other company locations or with other employers.
The smaller cattle herd has had beef processors competing for cattle and paying historically high prices for them. While beef prices have increased, they were still not high enough to offset the cost of the cattle, analysts said.
"It's simply that packer margins have been in the red pretty consistently since early last summer," said Dan Vaught, an economist with Doane Advisory Services in St. Louis, Mo.
"The industry was waiting on someone to blink, and it turns out to be Cargill," he said.
HedgersEdge.com, a Colorado-based livestock market advisory firm, put the average beef packer margin for Thursday at a negative $36.95 per head, compared with a negative $46.90 on Wednesday and a negative $66.75 on Jan. 10.
Shares in Tyson Foods Inc were up 3.8 percent at $21.23 in afternoon trading on the New York Stock Exchange.
Word of the Cargill plant closing dropped Chicago Mercantile Exchange live cattle futures by their 3-cent daily price limit before partially recovering.
CME cattle futures for February delivery closed at 126.600 cents per lb, down 1.925 cents, or 1.5 percent.
Initial market reaction was tied to sentiment that there would not be a market for all of the cattle that are shipped to the Plainview, Texas plant, said chief stratigist Rich Nelson with Allendale Inc in McHenry, Ill.
But, some of that bearishness was mitigated by Cargill saying the cattle would go to its other plants in the area.
Also, investors speculated that packers may become more aggressive about buying cattle as their margins improve, said Nelson.
In response to whether another packing plant would close, Doane's Vaught said it would depend in part on the efficiency of the plant and availability of cattle supplies.
"I don't think you'll see any more close in the near future, simply because the packers will now compete on a new footing for supplies based on the diminished industry capacity," he said.