The economic signals to expand the nation’s cow herd may have been sent loud and clear this spring with record high prices, but reality suggests 2011 will likely be another liquidation year.

Record high prices for cash fed cattle last month produced excellent profits for cattle feeders, but ranchers also found exceptionally high prices for cull cows and bulls. Those prices lured many cows to market, further reducing potential calf production in the process. Additional cows are being driven to market by a disastrous drought gripping the Southwest.

Indeed, the drought is becoming one of the year’s most important issues affecting agriculture. The U.S. Drought monitor map shows more than a quarter of Texas now in the most severe drought category. Exceptional drought means extraordinary and widespread, crop and pasture losses and shortages of water in reservoirs.

Texas has suffered through above-average temperatures and below-average rainfall due to a La Nina weather pattern since last summer. The state had the driest March-April period on record, and the driest October on record going back to 1895.

The U.S. beef industry may also suffer from the effects of recent flooding in the Midwest that threatens the nation’s corn crop. Grain prices are already significantly higher than last year, and a weather disruption to this year’s crop may add to the market’s volatility.

“Grain/feed price uncertainty is a major concern right now,” says Purdue ag economist Chris Hurt. “If a normal growing season develops this summer, expansion of the nation’s cow herd could begin by early 2012.”

But Hurt sees several obstacles to the likelihood of beef inventory expansion.

“Calf prices have been at record highs recently, but costs of production are tremendously high.” He notes that $7 corn, $350 per ton soybean meal and $170 per ton distillers grains push the cost of production for calves over $160 per hundredweight.

“High feed prices are most harmful to the species that uses the most grain/meal per pound of gain. High feed prices result in smaller supplies of all meat products, but the largest negative impact would be expected on beef, then pork and broilers the least. It has been argued that the beef industry may have some advantage in their ability to utilize forages. But land is in such short supply now that forage prices are nearly as high (relatively speaking) as corn/soybeans/wheat/cotton/rice prices. If so, then beef loses that advantage.”

Sterling Marketing president John Nalivka agrees with Hurt’s assessment, and bluntly says, “A year from now we will see another sharp decline in the size of the U.S. cattle herd.”

Nalivka’s prediction is based on what he sees in the latest inventory data from USDA.

“The number of replacement heifers reported in the January 1 Cattle Inventory Report supports the idea that even with much higher prices, there is very little incentive to build herds.”

Slaughter data since the inventory report seems to support those claims.

“We have already seen a 2 percent increase in heifer slaughter this year through the first quarter, and a 2 percent increase in heifers on feed on April 1. Those two key stats – together with drought in the Southwest – do not provide the ingredients for herd rebuilding.”

Nalivka also believes ranchers are taking advantage of this spring’s higher prices to “clean up balance sheets.”

Even if ranchers were inclined to begin an expansion phase, the results will not be visible for quite some time.

“If we begin holding more replacement heifers – and that’s a big if right now – we wouldn’t see a turnaround in the inventory numbers until 2014,” Nalivka says. “Right now the nation’s herd seems to be liquidating toward 90 million.”