SAN FRANCISCO (MarketWatch) — Much like the polar vortex spiked demand and prices for natural gas in the eastern U.S., another weather phenomenon — a severe drought — is threatening cattle and milk production and food crops in the West.

It’s a threat that can last for months and year, and parched conditions have already driven up prices on milk and cattle futures.

“The hardest hit section of California is the Central Valley — ‘the supermarket to the world’ — and [it’s becoming] increasingly clear the region won’t see relief from the devastating drought anytime soon,” said Kevin Kerr, editor of CommodityConfidential.com. “Retail prices for many key agricultural commodities could jump.”

That means consumers may see higher prices for everything from beef and milk to wheat, nuts and vegetables, and it’ll take time for supplies to replenish.

Drought conditions cover more than 37% of the 48 contiguous states, according to the U.S. Drought Monitor. MDA Weather Services said about 67% of California alone is currently experiencing extreme or exceptional drought conditions.

The state’s Gov. Edmund “Jerry” Brown, Jr. declared a drought State of Emergency on Jan. 17, calling on California’s residents to voluntarily cut water consumption by 20%.

The state is “already taking steps to limit water usage, so it is likely that irrigation supplies will be limited as well,” said Kyle Tapley, senior agricultural meteorologist of weather services at MDA Information Systems LLC.

California’s current drought “ranks as one of the worst, if not the worst, on record,” he said. Given that it’s the top producing state nationally for lemons, limes, peaches, strawberries and a variety of vegetables, as well as almonds, walnuts and pistachios, these and other crops could face production problems.

The state is home to many permanent crops, and some of the trees that grow the crops are more than 20 years old, said Mitch Kasper, managing principal with Midwest AG Investors.

The vegetable and fruit farms have been “very profitable because of water subsidies, but without a reliable water supply, they will be in serious trouble,” he said. “If the water is cut off from the permanent crops, the farmers could lose their entire investments.”

The state is also a top producer of milk cows and milk production will likely be reduced “due to the poor conditions of pastureland from the drought,” said Tapley.

Already, the commodities market has seen historical highs in recent weeks for cattle and milk futures, largely due to the impact of the drought.

Live cattle futures US:LCG4 hit a closing high of $1.439 a pound on the Chicago Mercantile Exchange on Jan. 23 this year, which was the highest most-active- contract closing level on records going back to Nov. 5, 1984, according to FactSet data.

Also on the CME, milk futures US:DAG4 class III, which is used to make cheese, closed at $23.29 per 100 pounds on Jan. 30 of this year. That’s the highest close for most-active contracts, according to FactSet data going back to April 3, 2006.

Dwindling cattle herd

Signs of the drought’s impact are only beginning.

“Even if it starts raining tomorrow, the high beef prices that we’re seeing may be around for awhile because it’ll take a couple of years to replenish the size of the cattle herd, which is dwindling,” said Sal Gilbertie, president and chief investment officer at Teucrium Trading LLC.

Drought brings history back to life in the West

Cattle and calves in the U.S. as of Jan. 1 of this year totaled 87.7 million head, the lowest Jan. 1 inventory of all cattle and calves since 1951, according to data from the U.S. Department of Agriculture.

The California cattle herd is being liquidated, said Ned Schmidt, editor of Agri-Food Value View, an information source for investing in agriculture. “No water, no grass, no hay, and feed would have to come too far and at too high a cost.”

And for winter wheat US:KWH4, the market’s starting to worry about the effects of the drought on spring wheat planting, which occurs between April and May, Teucrium’s Gilbertie said. There’s even some moderate drought in midwestern states like Minnesota and Iowa, which are big soybean US:SH4 and corn producers US:CH4.

For certain types of commodities, it can be years before supplies recover but for others, such as soybeans and corn or other field crops, supplies can be made up pretty quickly, in a few months’ time, said Gilbertie.

But the drought alone isn’t to blame for production problems facing the market.

Supplies of some of these commodities were already suffering for other reasons. David Maloni, president of the American Restaurant Association Inc., said milk prices recently tapped record prices due to strong exports and cold weather in the Midwest, while beef and cattle set records due to the already existing tight cattle supplies.

And if history’s any guide, maybe the U.S. market shouldn’t worry just yet.

According to the American Restaurant Association, the average annual milk production gain in California since 1985 is 3.5% but during drought years, the average gain for the state has been higher at 3.8%. Average California price inflation for beef during the state’s drought years has also been lower than the U.S. annual average.

“We anticipate the drought in California to bring price spikes to various food products at times, but it should not be longstanding,” said Maloni.

Still, taking look at the 2012 drought year for the state, the figures offer no comfort.

The U.S. drought of 2012 caused record prices in grains, with soybeans now “stable” at $13 a bushel compared with the 2012 peak of around $18, said Alan Knuckman, chief market strategist at Trading Advantage, a market education and trading training firm. Corn was most impacted, he said, noting that at about $8.50 a bushel at its peak in 2012, it was around double the current price.

So what’s a trader to do?

“Limited-risk commodity call options can provide the staying power that a potential weather market brings,” said Knuckman. A call option allows a trader to buy an asset at a fixed price up until the expiration date of the call.

Exchange-traded funds with options exist in the Teucrium Corn Fund CORN, +1.22% and Market Vectors Agribusiness ETF MOO, -0.46% , said Knuckman.

“Weather is the variable that [is] most unpredictable, with any disruption to normal conditions an opportunity,” he said. “Counting on perfect growing conditions requires a lot of faith and does not occur often from plant to harvest.”

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