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Cattle herd expansion is on

The slimming down of the U.S. cattle herd on account of high feed costs seems to have dried up, and now herd expansion appears to be in the cards through this year, one economist says.

Late last week, USDA's Cattle Inventory report showed all cattle inventory down 2%, with a slightly smaller calf crop in 2011 and about 2% fewer cows and heifers than January 1, 2011. It's a clear sign to Purdue University Extension livestock economist Chris Hurt that herd contraction continued through the year, but at a slower pace than the previous year. And, some more specific numbers from USDA's report show "very early stages" of herd expansion.

"This is the first increase in heifer retention since feed prices began increasing. The drought continues to retard expansion in Texas where heifer retention is down ten percent and in Oklahoma where retention is down 16%," Hurt says. "However, the expansion of the breeding herd appears to be underway in Nebraska, South Dakota, Colorado, Wyoming, and Iowa where retained heifers are up by double-digit percentages."

That geographic change is no anomaly; the southern Plains drought last year had a lot of producers moving their cattle north.

"I'm hearing of some expansion in northern areas, specifically in Illinois," says Kevin Penner, market analyst and trader with AgTraderTalk.com. "With the drought decimating herds in the south, it seems that producers are starting to consider re-establishing some cattle in corn country, closer to the feed supply."

Last year also saw a lot of adjustment to beef supplies, Hurt says. And, feed prices will likely moderate this year after spending much of the last year in the stratosphere. These are a couple more reasons herd growth is in the cards, but it won't necessarily mean a boost in beef supplies for a while. And, more importantly for cattle producers, it won't mean a downward move in cattle prices for at least another 2 years.

"While some may see the early signs of heifer retention as bearish for 2012 prices the opposite is most likely true. This is because the retention of heifers reduces slaughter supplies and beef supplies. Because of the reduction in the cow numbers, the calf crop will be down over 2% in 2012," Hurt says. "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."

Should cow-calf operators take this upward move in heifer numbers as a cue to follow suit? Not quite yet, Hurt says. A couple of things have to happen first; southern Plains weather should unfold to see if the drought of 2011 is going to continue this year. And, Hurt says it will be best to wait to see how crop conditions unfold this spring and summer.

"Rainfall for much of the southern Plains has been above normal for the past couple of months, while NOAA continues to forecast that drought conditions will persist through at least the spring for that area and that drought will continue, or develop, for much of the southern tier of states from California to Florida," Hurt says. "The 2012 U.S. crops will have favorable yields. This is because NOAA is forecasting that a region of the western Corn Belt will continue to be very dry into the spring, which raises concerns for corn and soybean meal prices. Higher feed prices would tend to depress calf prices."

What's all this mean for the cattle market moving into this summer? Despite this forecast herd growth, the market will likely continue moving higher through at least the next year.

"The first signs of expansion do little to change the bullish cattle price forecasts. Look for finished cattle prices to push into the higher $120s this spring, moderate to the mid-$120s this summer, and finish the year near $130," Hurt says. "Spring highs in 2013 could climb to the low $130s."

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