U.S. cattle inventories fell to the lowest level since 1952 after a drought in the south scorched pastures, prompting ranchers to shrink herds. These historically low cattle supplies are expected to drive up beef prices for the second year in a row, further stretching consumers coping with unemployment and mostly stagnant wages.  Retail beef prices, now near record levels, will likely rise 4 to 5 percent this year following a 10-percent increase in 2011, according to the U.S. Department of Agriculture (USDA).

USDA reported that, as of January 1, 2012, beef and dairy farmers held 90.77 million head of cattle, down 2.1 percent from a year earlier.  “We had one of the biggest droughts in Texas this year,” said Chad Henderson, a market analyst at Prime Agricultural Consultants Inc. “Guys have been ripping up pasture and planting crops.  It’ll take years for this thing to build back up.”

Cattle futures in Chicago surged to a record $1.29675 a pound on January 25.  Texas, the top state producer, had its driest year on record in 2011, according to the National Weather Service.  The drought destroyed pastures and made for meager supplies of grass and water to feed cattle.  The drought crisis added to a long-term trend of ranchers thinning their herd as ranchers were forced to sell or slaughter animals rather than incur feed costs driven up by the soaring price of corn–a primary feedstock for cattle.

At the same time, U.S. beef exports jumped about 22 percent last year on surging demand from Canada, Japan, South Korea, and Hong Kong.  The falling dollar, which makes U.S. shipments less expensive for foreign buyers, also fueled the increase in exports of beef.  The combination of low supplies and strong foreign demand lifted cattle prices despite falling U.S. consumption, said John Nalivka, owner of the consulting firm Sterling Marketing.  Meat packers and retailers have not been able to pass the entire cost increase to their customers, and with unemployment still at 8.5 percent, consumers may resist further big price increases, Nalivka said.