The U.S. beef herd has been shrinking, and the worst drought in decades has only encouraged that trend to continue. But for beef producers who can withstand the financial hardship over the next several months, reduced beef supplies could mean bigger profits starting as early as late 2013.
The U.S. Department of Agriculture's midyear cattle inventory report showed beef cow numbers dropped by 3 percent in the last year. It projects the 2012 calf crop to be down 2 percent from last year, and down 8 percent since 2006.
Part of what has been driving the decline is skyrocketing feed costs and prolonged drought in the Southern Plains, said Chris Hurt, Purdue Extension agricultural economist.
"This year's drought likely means further decreases in cow numbers over the next 12-14 months," he said. "The impacts of the drought are just beginning to show up in some of the national data. We do know the direction, but not the final magnitude."
(For more, see: Livestock industry takes direct drought hit)
Since mid-June, corn prices have jumped by 60 percent and soybean meal prices by 25 percent. And according to the USDA, 82-92 percent of the pastures in Indiana, Illinois, Arkansas, Missouri, Iowa, Kansas, Nebraska and Colorado are in very poor or poor condition.
The lack of available feed crops and forages and the high prices for what is available have forced many producers to start culling their herds. As more cattle have entered the market, the value of calves and feeder cattle has fallen.
"In the wake of high feed prices and uncertainty regarding forage availability, calf and feeder cattle prices plummeted," Hurt said.
For example, Oklahoma steer calf prices were $173 per hundredweight in mid-June but fell to $138 in late July. A $35 per hundredweight decline on a 550-pound calf is a nearly $200 per-head value reduction.
"Multiplying that across a national calf crop of 34.5 million head totals a potential decline in value of nearly $7 billion," he said. "It is still too early to count the actual damages, but this illustration shows it's likely large."
The silver lining, Hurt said, could be for producers who are able to weather the financial storm and hold onto their herds. As cattle numbers fall below beef consumer demand, prices should rebound.
Producers likely best positioned to keep their herds are those who locked in lower feed prices in the spring. That would mostly include large feedlots that tend to hedge on feed and feed cost and profit margins.
"The message for cow-calf producers is to hold onto the cows if possible," Hurt said. "The short-term losses of the next 12 to 14 months will be replaced by large profits in late-2013, 2014 and 2015."
Hurt said the anticipated "golden days" are based on reductions in per-capita beef supplies, leading to higher retail beef prices, and an expected return to more normal crop conditions in 2013.
While that could revive some optimism in the cattle industry, Hurt was quick to point out that most thoughts of herd expansion would be pushed off until late 2013.
"The exception is for producers in areas of the country that have abundant forages," he said. "For them, buying cows sold this fall from distressed owners appears to be a strategic move."