Speaking to the dual feelings of disbelief and wariness many producers are expressing amid record-high cattle prices (see Price Records Keep Falling), Derrell Peel explained last week, “There are some very solid reasons why we are seeing record cattle prices and still have expectations for even higher prices. Limited cattle numbers, high grain prices that temper carcass weights and the need to reduce heifer and cow slaughter all suggest that supplies will tighten significantly in 2011 compared to recent years.”

Peel, Extension livestock marketing specialist at Oklahoma State University, says current supply fundamentals, the major force in the price explosion, have been unfolding since the early 2000s when drought conditions across a significant portion of the U.S. extended the last major cyclical herd liquidation.

“Bovine spongiform encephalopathy shocks in 2003 pushed the industry to new levels of intensity with tight feeder supplies offset by placing ever younger and lighter cattle into feedlots,” Peel says. “This reaction worked well as long as corn was cheap.”

By 2004, prices had reached a level that resulted in limited herd expansion that year and in 2005. In 2006, the world marketplace changed with grain prices jumping to new levels, which have continued fundamentally higher and provoked long-term beef industry adjustments that continue even today.

Peel points out the loss of profitability caused by high and volatile input prices since late 2006 also prompted additional liquidation, which has contributed to today’s extremely tight cattle inventory numbers.

“A continuation of strong export demand and indications of recovery in domestic beef demand will allow cattle and beef prices to move higher. Just how high? No one knows,” Peel says. “The key is demand and just how much higher prices can be supported. As is typical, the market will probably overshoot at some point and pull back a bit to reveal what the top really is. It does not appear we are close to that level yet and even when we do (get close), we will likely stay at historically high levels for some time. The situation that led us to this point has been a decade in the making and will not unravel very quickly.”