CHICAGO, June 4 (Reuters) - U.S. feeder cattle futures surged on Thursday as ranchers and traders were on high alert for more potential cases of the flesh-eating screwworm parasite.

The U.S. Department of Agriculture confirmed late on Wednesday that New World screwworm was detected in a Texas calf after the pest advanced north through Mexico over the past year.

USDA Secretary Brooke Rollins said on Thursday the agency believes it can contain the case, the first in Texas since 1966. Wider infestations could further shrink the U.S. cattle herd, which is the smallest in 75 years.

"The New World screwworm sounds like something from a horror movie, but it's real," said Nate Sheets, a Republican nominee for Texas agriculture commissioner. "It is an agricultural emergency."

VOLATILE CATTLE PRICES

Feeder cattle futures initially dropped on the Chicago Mercantile Exchange as traders worried the infestation could reduce consumers' appetite for beef. Futures quickly turned higher, rallying by more than 3%.

The detection threatens Texas' livestock industry, which could face up to $1.8 billion in estimated economic losses if screwworm spreads, experts said.

"We're going to need to see how fast it spreads and how the consumer reacts," said Matt Wiegand, commodity broker for FuturesOne. "Until we see a big demand impact from the consumer side, (cattle) numbers are still tight."

U.S. cattle supplies dwindled after a persistent drought hiked feeding costs and forced ranchers to slash their herds. The decline has left meatpackers, such as JBS, Cargill and Tyson Foods, struggling to find enough animals to process in their beef plants.

The Meat Institute, which represents processors, urged USDA to consider allowing "low-risk" shipments of livestock for slaughter after the agency said it had frozen animal movement in an area around the case. Such shipments could include animals moving directly to slaughter from a farm that is not infested, the institute said.

USDA spent millions of dollars attempting to keep out the pest. The infestation signals screwworm flies arrived in the U.S. anyway and will expand in wildlife populations, said Lee Haines, an associate research professor of biological sciences at the University of Notre Dame in Indiana.

"The burden falls hardest on farmers who must monitor animals scattered across vast open rangeland, often going unobserved for days at a time," Haines said.