Purdue University Extension economist Chris Hurt says the recent USDA Cattle on Feed report indicates the U.S. Cattle industry is in the very early stages of expansion as beef heifer retention has increased a modest 1 percent. He says the previous liquidation, driven by high feed prices, may be coming to an end. This is because beef supplies have now adjusted downward and cattle prices have adjusted sharply higher. Still, Hurt believes beef supplies will be very short for several more years.

In a review of the USDA report, Hurt says – there have been two dominant drivers of cow numbers in recent years. The first was the dramatic increases in feed prices after calendar year 2007. The beef industry couldn’t pass higher feed costs on to consumers in 2008 and 2009 but instead had to suffer negative margins. Poor returns led to liquidation of beef cows, which has continued into the current report.

Hurt added, – the second large driver was drought in the southern Plains in recent years that caused further liquidation of cows due to lack of pasture and forages. He says – the impact of these two factors resulted in U.S. beef cow numbers dropping 3 million head, or 9 percent, since 2007.

What does this first hint of expansion mean to cattle prices in 2012? Hurt says – because of the reduction in the cow numbers, the calf crop will be down over 2 percent in 2012. If heifer retention continues to grow in 2012 and 2013, beef supplies will not increase until 2015. So the modest heifer retention now is actually a price-enhancing factor in the short run with the bearish implications not occurring until 2015 and beyond.

Courtesy: NAFB News