Chicago - A devastating drought, record feed costs and intensifying competition with cash crops for land are accelerating a five-year decline in the U.S. cattle herd, which is forecast to be the smallest in six decades as of Jan. 1.

The U.S. Department of Agriculture's bi-annual cattle inventory report on Friday, expected to show a 1.4 percent drop in cattle numbers from a year ago, may give cattle futures, already record high, another boost; drive meat prices to new highs and roil packers like Tyson Foods Inc.

Analysts polled by Reuters expect the data to show the U.S. cattle herd at 91.26 million head, the smallest since 1952 and down from 92.58 million a year earlier.

While monthly data showing a sharp decline in the number of cattle heading to feedlots has already put a spotlight on diminishing supplies in the near term, Friday's figures should highlight how a shrinking inventory of beef cows may keep beef and cattle supplies tight for months if not years to come -- even as beef exports boom.

"This report (on Friday) is expected to confirm what people have been thinking about," says Jim Robb, an economist at the Livestock Marketing Information Center in Denver. He said wholesale beef prices will set record highs in 2012 and 2013.

Preview: Shrinking U.S. cattle herd smallest in 60 years



The drought in the southern Plains, that stretched through nearly all of last year, has been a primary driver in ranchers liquidating their herds. It also has them selling their calves to auction barns and feedlots soon after being weaned off milk.

The loss of pasture, which the calves feed on until they are big enough to enter feedlots where they will be fattened on a diet of corn, has been compounded by the tripling of hay prices to more than $100 a bale in Texas.

"Hay is very short in Texas and it's the staple feed here. We basically have to import hay," said James Gray, general manager of the Graham Land and Cattle Co., a feedyard in south-central Texas that can hold up to 30,000 head of cattle.

Gray said cattle are in such short supply in his area that he has been getting calls from buyers at Tyson Foods and the U.S. operations of Brazil-based meatpacker JBS -- the world's largest meat processor -- from 500 miles to the north in Amarillo and Plainview, Texas.

"The big packers like Tyson and JBS are scrambling to obtain supply lines and are forging new relationships," he said of these companies reaching out to him to be cultivated as a source of cattle for their processing operations.

As some ranchers move their herds to greener pastures in the north, they are also increasingly in competition with farmers for finite land resources. High prices for corn, soybeans, wheat and cotton have encouraged planting every available acre to crops leaving less for pastures.

"People are growing corn on hay land," says Robb.

Robb said the drought in the southern Plains and the high cost of corn is changing the landscape of the cattle industry, adding that smaller feedlots -- those with less than 1,000 head of cattle -- could be forced to shut down while beef processors could shutter some plants as costs escalate.

"Beef companies with several plants will shut down one. More and more smaller feedlots will be forced out of business," he said. "There will be a margin squeeze due to the supply side."


Live cattle futures have risen to a record high due to tightening supplies, strong beef exports, and an inflow of managed money into the market, which was one of the best performing assets in commodities in 2011.

Benchmark February cattle futures rallied to an all-time high of 126.375 cents per lb on Wednesday, eclipsing the previous peak of 126.075 set on Friday. Prices are up 13 percent from a year ago.

These gains are expected to impact beef prices, which have already been hitting record highs in recent months.

Latest USDA data shows retail prices for beef in December hit a record high for the fourth straight month. December's record price of $5.01 per lb is up 10 percent from January 2011.

Analysts said the price increases due the smaller cattle supply could be exacerbated by strong exports of beef, particularly if Japan allows in more U.S. beef. Japan slammed its market shut after the first of mad cow disease in the United States in late 2003, but since then has gradually reopened its market.

Japan, once the top export market for U.S. beef, is now near a decision to allow imports of U.S. beef from cattle that are 30 months old, which could prove pivotal in boosting sales to that country.

Japan currently imports beef from U.S. cattle that are 20 months or younger as chances of contracting mad cow disease are believed to be lower in younger cattle.

While the shrinking U.S. herd will add to the distress in much of the industry, business has never been better for David Shelton, owner of a cattle auction barn in south-central Texas.

There has been a rush by ranchers to sell cattle, even their three-month-old calves, because the historic drought in the state has decimated pastures. In addition, feed corn prices surging to a record high near $8 per bushel last year added to the pressure.

"Business has been real good," Shelton said with a chuckle. "But it's not a good thing in the long run."