CHICAGO, May 20 (Reuters) - Cargill stopped paying about 1,700 employees at a beef plant in Fort Morgan, Colorado, on Wednesday in an escalating labor dispute, after suspending cattle slaughtering at the facility a month ago, the workers' union said.

   The U.S. beef industry is in a period of upheaval as prices have set records this year, with strong demand from consumers even as the nation's cattle herd is the smallest in 75 years. 

Meatpackers are processing fewer cattle due to tight supplies and reporting losses in their beef businesses because soaring cattle costs have outpaced gains from higher meat prices.

Cargill and rival JBS, which resolved its own labor dispute last month, have pushed back against employees seeking higher pay. Workers, faced with a rising cost of living, have dug in against billionaire owners.

Privately held Cargill said it initiated a lockout in Fort Morgan, about 132 kilometers northeast of Denver, after employees rejected a contract proposal that the company called fair, saying it represented an estimated $33.4 million investment in employees.

"This was not the outcome we wanted," Cargill said in a statement.

Cargill offered a raise of 70 cents per hour in the first year of a five-year contract and a 30-cent raise in the fifth year, said Dean Modecker, who runs the Teamsters Local 455 union that represents workers. Employees were seeking a $1 raise in the first year and want a three-year contract due to volatility in the beef industry, he said. 

Since 2018, base wages increased to $23.50 per hour from $15.35, according to Cargill.

"We can't afford to pay our bills," Modecker said, noting higher gasoline prices.

"This is a multi-billion-dollar corporation, yet we can't get a dollar-an-hour raise?"

President Donald Trump has accused meatpackers of driving up beef prices through collusion and directed the Department of Justice to investigate them. Cargill and JBS are among four major U.S. beef processors, along with Tyson Foods ( TSN ) and National Beef Packing Company.             

"When the beef industry is doing bad, we're willing to be with them," Modecker said. "But when the beef industry is doing good, we want them to pay us."

Cargill said it has halted slaughtering in Fort Morgan since April 23 and redirected cattle to other processing plants. The facility's costs exceed its returns, according to the company.

"We cannot operate the facility safely and responsibly amid continued uncertainty of a potential work stoppage," Cargill said.

Cargill continued to pay employees while slaughtering stopped, though that ended after workers rejected the contract offer, Modecker said. He said workers were also frustrated over bathroom breaks.

"Literally we have people urinating in their pants because they are not allowed to go to the bathroom," he said.

Cargill said it was committed to providing employees adequate restroom access and treating them with dignity.

This spring, about 3,800 employees ‌at JBS's beef plant in Greeley, Colorado, went on strike over pay and working conditions. At Tyson Foods ( TSN ), thousands of workers lost their jobs this year when the company closed a beef plant in Nebraska and reduced operations at a Texas facility.