Profitability always makes a business outlook brighter, and if you’re in the cattle or hog business today, your mood is probably brighter than it has been for a few years. Yet, there are plenty of concerns that may keep you awake several nights this year.

Better prices for cattle and hogs are directly related to smaller inventories. Hog producers, for instance, have reduced their inventories to 64.3 million, according to USDA’s quarterly Hogs and Pigs report released Dec. 27, 2010. That’s a decline of one percent from the previous year, and two percent from Sept., 1, 2010. The number of market hogs was also reported down one percent from 2009, and two percent from Sept. 1. The declining inventory has boosted prices, and producers expect modest profit in 2011.

The U.S. cattle herd has also shown signs of declining inventories. USDA will release its January 1, 2011, inventory numbers on the 28th of this month, but most industry analysts expect the numbers will be down another one percent from last year.

Oklahoma State University economist Derrell Peel told Drovers/Cattlenetwork this week he expects the beef cow herd to total about 31.1 million head, which would be the lowest beef cow inventory since 1963. The number of cows and operations both have seen decline for 35 years.

Fewer cows and fewer feeder cattle contributed to rising prices during the last half of 2010, and early 2011. And strong export demand has fueled a rally in fed cattle prices early this year. The declining inventory has meant better prices, yes, but the long-term effect of a significantly reduced cow herd has many analysts concerned.

Cattle and hog producers should also be concerned that their products are contributing to rapidly escalating retail food prices, a phenomenon that has become a significant global issue. World food prices are back at levels last seen in 2008, a year that was described as a food crisis when riots spurred bans on food exports in many countries.

Last week the American Farm Bureau Federation released its fourth quarter Market Basket survey, an informal survey that showed the total cost of 16 food items was up about two percent compared to the third quarter. Bacon, eggs, whole milk, sliced deli ham and bread increased the most in dollar value compared to the third quarter.

But America’s rising food costs pale in comparison to price escalation world-wide. The U.N. Food and Agriculture Organization’s (FAO) index of world food prices rose 32 percent during the second half of 2010, topping the peak of 2008. Higher food prices are the result of drought and floods in some countries, and record demand for sugar and soybeans by China. Developed countries’ grain stocks are expected to decline 25 percent in the 2010-11 crop year, according to the FAO.

According to Ephraim Leibtag, USDA food price forecaster, “Increased global trade coming out of the recession, some increased consumer demand, and higher energy and commodity costs for food production” will boost prices. USDA expects a rise in oil prices to lift demand for ethanol by more than five percent in the U.S., which will increase corn prices. USDA expects U.S. food inflation of two percent to three percent, the highest since 2008.

Still, according to USDA, Americans spend just under 10 percent of their disposable income on food, the lowest average of any country in the world.

By Greg Henderson, Editor, Drovers/Cattlenetwork