Cattle feeders pocketed good profits during the first four months of the year, but as the second quarter progressed seasonally lower fed cattle prices collided with surging feedstuff costs. Cost-of-gain in feedlots shot-up to well over $100.00 per cwt. Corn costs set record highs and caused rather volatile calf and yearling prices.

Several forces are shaping the U.S. cattle and beef industry, all of which may have rather long-term implications. First, drought is shrinking the U.S. beef cowherd, which had already shrunk during recent years. Second high feedstuff costs are very problematic, a situation that is likely to persist. Overall, three factors will continue to support cattle prices: 1) cyclically shrinking cattle supplies; 2) strong export markets (beef and byproducts); and 3) rather tight domestic supplies of competing meats and poultry.

There are lots of questions about 2012; importantly will the U.S. slip into another economic recession? How high will oil and corn prices be? Preliminary forecasts for 2012 assume modest economic growth in the U.S. and corn prices slightly lower than 2011's record high.

Preliminary forecasts for 2012 put the slaughter steer price 5% to 8% above 2011's. The strongest prices of the year are forecast to be in the second and fourth quarters, similar to the seasonal pattern of 2011.   For the first time ever, quarterly average fed cattle prices over $120.00 are possible.

The dominant factor influencing calf and yearling markets in 2012 will be grain prices. Crop-year ending corn stocks will only amount to a few weeks of usage in 2012. Grain prices are expected remain volatile, causing potentially large price swings in calf and yearling prices. Opportunities to make money by putting pasture-based weight gains on calves should continue, given on-going high cost-of-gain in feedlots. Of course, volatile prices mean sound business and risk management plans need to be developed before purchasing calves.

In the Southern Plains, forecasts call for yearling and calf prices in 2012 to post a small annual increase. It will be difficult to match the yearling and calf prices posted in the first quarter of 2011 given costs faced by cattle feeders. Over the calendar year, the weakest yearling prices could be in the first quarter of 2012, again assuming a normal growing season next summer. Still, a very strong fed cattle market should keep yearling prices above 2011's for the second half of the year. For the year, 700-to 800-pound steers in the Southern Plains are forecast to average in the $129.00 to $137.00 per cwt. range, which would be slightly above 2011's.

Calf prices could post modest year-on-year declines during much of the first half of 2012. But in the second half of the year prices could post annual gains. In fact, calf prices in the fall quarter of the year could eclipse 2011's by several dollars per cwt.

The Markets

Fed cattle prices gained ground at the end of the week as packers dramatically reduced their margins to get animals. Live slaughter steers were up nearly $4.00 per cwt. for the week and were 21% above a year ago. The average wholesale price of beef (Boxed Beef) actually declined slightly last week and the Choice-Select price spread continued to narrow. Yearling and calf prices were steady with the prior week. Northern states like Montana have very good grass conditions, so calf and yearling prices there are mostly unreported. Compared to a year ago, yearling prices (700-to 800-pound) were up fully 18% while calves (500- to 600-pound) were up a more modest 11% to 14%. Corn costs remained nearly double year ago levels at $7.14 per bushel at Omaha. For the week, corn cost dropped slightly and Distillers Dry Grains (DDGS) were about steady.