The Jan. 1 cattle inventory came in at 89.8 million head, up 1.3 million head or 1.4 percent from a year ago. From the 2007 peak to Jan. 1, 2014, the cattle inventory had declined 8 million head to 88.5 million, the lowest total since 1952. The liquidation phase of this cycle was extended at least a couple of years by drought and high feed costs. However, signs of a transition to expansion began to emerge in mid-2013 and extended throughout 2014. As pasture conditions improved and forage supplies increased, producers sharply reduced cow cull rates and began to hold back heifers to place in the cow herd. And that impact was evident in the upturn just revealed, occurring sooner than most analysts expected.

In part, the surprisingly large increase in cattle numbers was due to a nearly 800,000-head upward revision to the 2014 inventory to 88.5 million head. The majority of the increase was in calves under 500 pounds, adding 533,000 head to that category. Overall, the 2014 supply of feeder cattle outside feedlots was revised up 1.3 percent to 25.1 million.

In addition to the year-ago revisions, the report shows a larger than expected increase in the cattle inventory during 2014. While most of the various categories of cattle were higher than a year ago, the increases were concentrated in the number of beef cows and heifers for beef replacement. The beef cow herd as of Jan. 1 totaled 29.7 million head, a 600,000-head or 1.8 percent increase from a year ago, driven largely by an 18 percent yearly decline in the number of beef cows slaughtered during 2014. This follows a 6 percent decline in 2013.

Cow numbers increased the most in states with the largest number of beef cows, climbing 5 percent to 7 percent in Texas, Oklahoma and Kansas. The increase corresponds with improved pasture conditions across the southern Plains last year. Because of timely rainfall through the summer, the national pasture and range condition rating rose to the highest level in several years. However, most of the Southern Plains, along with the western quarter of the United States, are still suffering from moderate to exceptional drought conditions. Timely precipitation will be needed again in the Southern Plains through the spring and summer in order to maintain the larger cow herd and continue the expansion phase of the cattle cycle.

Producers are also retaining heifers in order to rebuild the cow herd. Heifers 500 pounds and over held for beef cow replacement are up 4.1 percent from a year ago to 5.777 million head, the largest increase in eight years. Similar to changes in beef cows, increases in the number of replacement heifers are concentrated in the Southern Plains. Within this category, the number of beef heifers expected to calve this year is up 7 percent from 2014. The increase points to fairly rapid expansion of the beef cow herd and calf crop over the next one to two years. Large cow/calf states with lower heifer replacements are Kentucky, Montana, Nebraska and North Dakota.

In contrast to upward revisions to most previous estimates, USDA lowered the 2013 calf crop by 200,000 head to 33.730 million. However, the 2014 calf crop is estimated at 33.9 million head, an increase of 0.5 percent from 2013 and the first increase since 1995. The calving rate of 88.5 percent is the highest since 2006 and compares to the five-year average of 87.6 percent. (The higher calving percentage can be attributed to favorable weather and aggressive culling of the cow herd in recent years, thereby resulting in a younger and more productive cow herd.) Given the size of the cow herd, the 2015 calf crop is set to increase by 400,000 to 500,000 head. USDA doesn’t break down the calf crop between dairy and beef calves, but based on the mix of cows, beef calves account for about three-quarters of the total calf crop. Cow/calf margins should remain very positive at $300 to $400 per cow over operating costs. The economic incentive to expand the herd will remain in place.

The number of cattle grazing on wheat pasture in Kansas, Oklahoma and Texas is estimated at 1.93 million head, up 320,000 head or 20 percent from a year ago. It’s also slightly above 2010’s 1.92 million head, reaching the highest level since 2007, when 2.6 million head were on winter pasture. Improved winter wheat condition ratings in the Southern Plains have supported the increase. (Very poor winter wheat conditions limited the grazing herd to 1.34 million head two years ago, the lowest total since the data series began in 2001.)

The dairy cow herd has been relatively stable, averaging about 9.2 million head over the past five years. However, dairy cow numbers rose 99,000 head or 1.1 percent from a year ago to 9.307 million head as of Jan. 1, which is in line with the monthly USDA data reported for December. Improving margins resulting from lower feed costs and rising milk prices through the first three quarters of 2014 appear to have encouraged expansion. While not as dramatic as the beef sector, dairy cow slaughter was down 10 percent during 2014 to 2.816 million head. Heifers for milk cow replacement are 1.5 percent higher than a year ago to 4.615 million head. Replacement heifers are up for Idaho, Texas and Wisconsin but down for Kansas, New Mexico, New York and Pennsylvania, while California is steady. Milk prices have fallen sharply over the past few months. So far the industry hasn’t responded.

Summary: The USDA Cattle Inventory report confirmed a decisive upturn in the cattle inventory, marking the beginning of the expansion phase of the long-term cattle cycle. Barring hot, dry weather across the Plains this summer, herd expansion is expected to continue for at least the next few years. The impact on beef production this year will be limited and cattle prices should average above 2014 levels, but the 2014 peak may not be exceeded. The quick surge in beef cow numbers and larger calf crop points to increased beef supplies by 2016.