The USDA's annual cattle inventory report suggests improving prices for 2010. That’s because the nation’s beef herd is down 1 percent, making it the smallest herd inventory since 1963.

Despite the smaller inventory, however, analysts remain cautious about beef prices as beef demand remains sluggish.

“Demand remains the biggest challenge for the beef industry in 2010,” says Cattle-Fax president Randy Blach. “Though the supply situation is very bullish, demand must stabilize in order for prices to turn significantly higher.”

Bullish supply fundamentals were confirmed in USDA’s annual inventory report which put the total number of all cattle and calves at 93.7 million on January 1. Additionally, USDA’s January cattle on feed report showed the on-feed inventory was down 2 percent compared to the same month last year and was the lowest total for any January since 2003.

Weaker consumer demand is a result of an economy that has kept consumers cash-strapped, forcing them to favor lower-priced meats like hamburgers and hot dogs over the higher value cuts such as steaks. Further, the recession has hurt the restaurant business, a significant market outlet for domestic beef sales.

“Casual-dining same-store sales are down 6 to 8 percent year-over-year and the high-end steak houses have had same-store sales down 20 to 30 percent in the last 12 months,” says Cattle-Fax market analyst Kevin Good. That decline in sales has translated to about $140 less per head for beef producers. And the decline in restaurant dining means consumers have eaten more at home, causing a shift in beef sales through supermarkets.

Even with softer U.S. beef demand, Cattle-Fax analysts believe cash cattle prices in 2010 will see an improvement over last year. Cattle-Fax projects:

  • Fed-steer prices will average $86 to $88 per hundredweight in 2010 compared to $83.50 last year. 
  • Yearling feeder steers weighing 750 pounds will average $99 to $101 compared to $95.50 in 2009.
  • Steer calves weighing 550 pounds will reach $111 to $113 compared to $107 in 2009.
  • Utility slaughter cows will average $53 to $54 compared to $47 in 2009.

Bullish ideas for this year’s cattle market are rooted in the cattle inventory report, which confirms that the factory of beef production has shrunk to lows not seen in nearly 50 years. In addition to the 1 percent overall decline in the nation’s herd, the number of beef cows is calculated at 31.4 million head, down 1 percent from 2009. A further indication of the struggles beef producers have seen the past year, heifers held for replacement was pegged at 5.4 million, down 2 percent from the 2009 total.

The 2009 calf crop was estimated at 35.8 million head, down 1 percent from 2008. Calves born during the first half of 2009 were estimated at 26 million head, also down 1 percent from the previous year.

Further reluctance by producers to build their herds can be found in January’s cattle on feed report. Analysts note there has a been a steady increase in the heifers’ share of the on-feed inventory. In January 2006, there were 55 heifers on feed for every 100 steers in feedlots. In January 2010, there were 59 heifers on feed per 100 feedlot steers. That steady increase in the proportion of heifers on feed correlates with a decline in heifers being retained for breeding and is a strong indicator the cow herd will continue to shrink.

A declining beef herd will tighten supplies of beef on the market and will support prices for live animals. But not every industry sector will welcome tighter supplies. The smaller herd could force some feedlots, and even some packing plants, to consider closing their doors.

“I don’t think it is any secret that we have 25 to 30 percent excess feeding capacity in this industry,” Blach says. Additionally, he says, a greater number of cattle are being fed by the largest feedlots, and the feedlots own more of the cattle, versus years ago when investors and ranchers owned the cattle.

For packers, the smaller herd means it will be harder for them to operate efficiently.

“The packing industry is also overbuilt, and given the expectation for smaller fed-cattle supplies the next few years, don’t be surprised if the industry loses another packing plant or two,” Blach says.