This article first appeared in the December issue of Drovers CattleNetwork.

The cattle herd is now firmly in expansion phase and producers should be thinking in those terms.

The U.S. cattle inventory last peaked Jan. 1, 2007, and then contracted for the next seven years. That was extended by a couple of years due to widespread drought across the Plains and Southwest. Now, however, USDA showed a 1.4 percent increase in all cattle and calves from January 2014 to January 2015 and an even greater 2.4 percent increase in its July 2015 mid-year inventory report.

Pastures are helping. The index for the U.S. pasture and range conditions as of mid-October was 221 on a scale of 0 to 400. While down from 235 a year ago, the current pasture rating is the third highest since 2000.

Beef producers are indicating further expansion this year by retaining more heifers and holding back cows from slaughter.

Also, the Jan. 1, 2014 inventory showed a majority of the increase was calves and yearlings, particularly heifers over 500 pounds. This indicates producers were retaining heifers more aggressively than expected early last year.

However, extreme to exceptional drought continues in the western United States, which will limit herd building from Arizona and California to Idaho, Oregon and Washington.

The 2015 calf crop is estimated at 34.3 million head, up 400,000 head from 2014. Based on the size of the cow herd this year, the 2016 calf crop is forecast to increase by 600,000 head to 34.9 million.

Feedlot placements during the first nine months of 2015 were down 5 percent from the previous year, reflecting declining feeding margins. Losses of nearly $400 per head in the fourth quarter of 2015 should decline to near breakeven in the first two quarters of next year.

After fed-cattle prices this year peaked in early April at $168 per hundredweight, the speed of their decline through September shocked many. Although prices have recovered, they are extremely volatile. Hopefully, the October low of $117.50 could hold for several months or perhaps a year or two, but the entire scenario reinforces that the market has changed.

Feeder-cattle prices peaked in mid-October 2014, with 700- to 800-pound steers fetching near $246 per hundredweight at the Oklahoma City auction. After a downturn and another run to $230, feeder cattle followed fed cattle down to $179 per hundredweight in November. Feeder-cattle supplies are forecast to increase over the next few years, putting downward pressure on prices. Feeder steers at the Oklahoma auction are forecast to average $190 per hundredweight in 2016 and continue gradually lower, averaging $170 per hundredweight for 2019.

Steer calves weighing 500 to 550 pounds in the Oklahoma City auction peaked at $310 per hundredweight in late November 2014 and have followed fed cattle and feeder cattle since. Calf prices are projected to average $215 next year and decline each year through the expansion phase.

Beef production is forecast to climb by 2.0 percent to 2.5 percent each year from 2016 to 2019.

Domestic beef demand was strong during the first half of the year but softened through the summer and early fall as beef faced increased competition from lower-cost pork and chicken.

Retail beef prices are expected to average $6.34 per pound in 2015, up from $5.97 in 2014. Although, as beef production increases, retail prices gradually will decline in 2016 and through the remainder of the five-year forecast.

High domestic prices and a strong dollar have cut U.S. exports and encouraged imports this year. However, as domestic beef production grows, exports should turn higher in 2016, and imports are forecast to decline.

Rising beef cow numbers will lead to a larger calf crop, increasing fed-cattle supply, rising beef production and cattle prices trending lower for the next four years.