The U.S beef cattle herd has been contracting for the past seven years. Drought and high feed costs prolonged the contraction phase, particularly during the past couple of years. The drought in the southern Plains during 2011 and 2012 continued to force liquidation. Some dryness persists, but rain during the late summer and fall this year has boosted pasture conditions and winter wheat grazing opportunities. As a result, demand for calves and feeder cattle for backgrounding programs is strong. Prices for feeder cattle have soared to record levels.

There are indications the process of expanding the herd is beginning. The first step is to curb beef cow slaughter. Through the first half of the year beef cow slaughter totaled 1.6 million head, up 3 percent from a year ago, as high feed costs and drought persisted in the Plains. Since July 1, though, beef cow slaughter rates have slowed dramatically, down 132,000 head or 13 percent from the same period a year ago. For the last four reporting weeks, beef cow slaughter is down 15 percent from 2012. If this rate of decline persists through the rest of 2013, beef cow slaughter for the year will be down 200,000 head from 2012 to 3.15 million.

The reduction coincided with improved pasture conditions and the outlook for hay production. The national pasture and range condition index declined seasonally through the summer but held above 300 through most of the summer compared to a drought-reduced rating index of 230 to 240 for most of the second half of 2012. Pasture conditions much improved from Oklahoma to Nebraska as of early August, with state-level ratings up 100 to 150 points from 2012 to index ratings of 250 to 335.

Condition ratings for Texas were only marginally better by late summer this year, but they have also benefited from improved moisture this fall. Improved pasture alleviated the pressure on producers to deeply cull or liquidate cow herds.

The economic incentive to expand the cow herd is compelling. Returns for cow-calf producers are projected at a record $200 to $250 per cow, about double returns for 2013. Feeder cattle and calf prices are at record-high levels. Steer calves at the Oklahoma City auction are currently trading at nearly $190 per hundredweight, up from an average of $172 in 2012 and $149 in 2011. The budget projections are based on average steer and heifer calf prices for 2014 of $175 and $155 per hundredweight.

In addition to reduced cow slaughter, heifer retention for placement in the herd is the other key variable in herd expansion. Data on heifer retention will be available as of Jan. 1, 2014. Heifer slaughter rates imply where the industry is heading. A lower percentage of heifers in the slaughter mix suggests that, rather than being placed in feedlots, heifers are being retained for the cow herd. Heifer slaughter so far in 2013 is averaging 36 percent, near the levels at previous points in the past such as 1992 and 2004 which were turning points in the beef cow herd. We estimate that the beef cow herd, as of Jan. 1, 2014, will be 28.8 million head, down 500,000 head or 1.7 percent from the previous year. With reduced cow slaughter in 2014 and increased heifer retention next year, the cow herd should edge up slightly by Jan. 1, 2015.

The stage is set to begin the process of rebuilding the beef cow herd. It does assume that moisture conditions stabilize or improve through 2014. No drought! A return to drought in 2014 is the biggest risk to the outlook for herd rebuilding.