Greg Henderson, Editor, Associate Publisher, Drovers CattleNetwork   |   Updated: November 15, 2011

America’s cattle industry can be aptly described by paraphrasing Charles Dickens: It’s the best of times; it’s the worst of times.

Cash fed cattle prices set new record-highs in April of this year then set the bar even higher last week with top prices at $127 per hundredweight. Feeder cattle and calves also posted price records this fall.

For cattle feeders, those record prices only produced modest profits. That’s because input costs – feed, replacement cattle and energy costs – have been rising steadily. So while gross returns to cattle feeding are at record levels, so too, are the costs associated with producing beef.

Next year promises more good news/bad news.

The good news is that 2012 will likely provide more opportunities to sell cattle at relatively high prices. The two driving forces behind that projection, industry economists believe, are tight supplies of market-ready cattle and a booming export market.

Cattle-Fax market analyst Kevin Good says U.S. steer and heifer slaughter will decline by 200,000 head this year compared with 2010, and next year Cattle-Fax expects another year-over-year decline of about 300,000 head. In total, the U.S. Department of Agriculture projects beef production to be down 5 percent next year.

A recent report from Rabobank, a leading agricultural lender in the U.S., projected beef supplies to increase 1 percent during the first quarter of 2012, but decline 1 percent, 6 percent and 7 percent, respectively, during the second, third and fourth quarters. By 2013, with more heifers remaining in breeding herds, steer and heifer slaughter could decline by another 600,000 head. Those tight supplies will be supportive of prices.

Demand for U.S. beef has also risen while production is declining. The U.S. Meat Export Federation says beef exports may account for 14 percent of total U.S. production this year, and that exports have added about $200 per head to the value of finished steers and heifers. Next year, USMEF projects beef exports of 1.3 metric tons, accounting for 15 percent of U.S. production and valued at $5.5 billion. That export total will add about $218 to the value of each finished steer or heifer.

The bad news for cattle feeders comes from the supply side of the equation – they’ll struggle to find cattle to feed. This year began with historically low U.S. cattle numbers – the smallest January 1 inventory of all cattle and calves since 1958, and the smallest calf crop since 1950.

The historic drought that plagued ranchers in Texas, Oklahoma and other southwestern states this year guarantees the next USDA cattle inventory report will show even smaller numbers for 2012. Conservative estimates suggest cow herd inventories have declined by 9 percent in Texas and 11 percent in Oklahoma this year, maybe more.

Unfortunately, herd downsizing may not be over. Even if ranchers start building their herds next year tighter supplies of feeder cattle will remain a frustration for feedyards for the next two to three years. Drought, however, seems reluctant to loosen its grip on cattle country which suggests cow herd expansion is unlikely next year.