* Drought, feed costs trim cattle supplies
* Packers may cut production to recoup margins
* Lower cash, higher beef price outlook
By Theopolis Waters
CHICAGO, Oct 6 (Reuters) - U.S. beef packing companies are suffering the largest losses in 2-1/2 years as tight supplies of cattle have them paying near record high prices for them, analysts and traders said on Thursday.
The losses could cause beef companies like industry leaders Tyson Foods Inc (TSN.N) and JBS USA, a unit of Brazilian company JBS SA (JBSS3.SA), to cut back on the number of cattle they slaughter, which could eventually lead to higher retail beef prices, analysts said.
"The cattle market ended last quarter with a bang. It was certainly a victory for the producer, but not for the packer whose margins are at their narrowest levels of the year," said Elaine Johnson, an analyst with CattleHedging.com.
The problem for these beef companies is that with unemployment topping 9 percent in the United States, they have been unable to fully pass on higher costs for the raw materials to consumers for fear of choking demand for beef or causing consumers to switch to lower-cost meats, such as chicken.
On Thursday, beef packer margins tumbled to an estimated loss of $56.20 per head of cattle versus an $11.60 loss a week ago. The $56.20 is the largest loss since the negative $56.50 per head margin on April 7, 2009, according to HedgersEdge.com, a Colorado-based livestock analytics firm.
On August 25, packers were reaping a profit of as high as $69.35, HedgersEdge said,
"Cattle producers haven't made much money in the past few years which shrunk the calf crop to its smallest since 1950. A big part of that has to do with high feed expenses for cattle," said University of Missouri livestock economist Ron Plain.
Corn futures Cc1 at the Chicago Board of Trade hit a record high in June on concerns over the U.S. crop but have since fallen sharply as investors sought safer assets in the wake of the debt crisis in Europe.
A spike in corn prices in 2008 to more than $7 per bushel contributed to this year's smaller cattle supply by discouraging producers from expanding herds.
In addition, for almost a year, persistent drought in the southwestern United States withered pastures and forced more cattle in feedlots, leaving behind a smaller supply.
That smaller supply has pushed up prices. Cattle in the U.S. Plains cash markets this week traded at $121 per cwt, $2 shy of a record high set in early April and up $8 from August 30.
Reporting by Theopolis Waters; Editing by Bob Burgdorfer