Although beef supplies will be very short for several more years, the USDA's Cattle report indicates that the very early stages of beef cattle expansion have begun as beef heifer retention has increased a modest 1 percent, said Chris Hurt, a Purdue University Extension economist.

"However, the big picture is that beef cow numbers dropped 3 percent last year, and this will mean a smaller calf crop in 2012 that will keep cattle slaughter small for 2013 and 2014. If producers follow through with more heifer retention in 2012 and 2013, slaughter supplies will decline over the next two years and increase finished cattle prices even more," he said.

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, he said.

The second large driver was the drought in the southern Plains in recent years that caused further liquidation of cows due to lack of pasture and forages, Hurt added.

"The impact of these two factors resulted in U.S. beef cow numbers dropping 3 million head, or 9 percent, since 2007. Every region of the country has reduced beef cow numbers since 2007," he said.

In the past year, the impact of the drought was felt most heavily in Texas where beef cow numbers were down 660,000, representing 13 percent of their herd. The second largest impact was in Oklahoma where the cow herd was reduced by 288,000 head, or 14 percent, last year.

The cows that were liquidated from the southern Plains in 2011 went in two directions, Hurt said.

"First, cow slaughter was high all year, indicating that many went directly to packers. However, a portion moved to areas that had better pastures and forage supplies. The biggest recipient was likely Nebraska where cow numbers were up 112,000 last year, but also Iowa with cow numbers up 55,000 and Colorado up 22,000 head," he noted.

Latest indications

There are now indications that the longer-term trend of cow 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, he said.

In addition, feed prices are expected to moderate if 2012 U.S. yields are close to normal. Beef cows have become very valuable property because of the shortage of beef that will be experienced in 2012 and beyond. This was demonstrated in the Cattle report by a 1 percent increase in the number of heifers being retained to go back to breeding herds, the first increase in heifer retention since feed prices began increasing.

"The drought continues to retard expansion in Texas where heifer retention is down 10 percent and in Oklahoma where retention is down 16 percent. However, the expansion of the breeding herd appears to be under way in Nebraska, South Dakota, Colorado, Wyoming, and Iowa where retained heifers are up by double-digit percentages," the economist said.