U.S. cattle feedlots will have “slightly negative margins” this year amid high costs for livestock feed, says Michael Swanson, an agricultural economist at Wells Fargo & Co.

The U.S. herd as of Jan. 1 shrank to a 61-year low after the most-severe drought since the 1930s, according to the USDA. Midwest corn output withered, sending the price of the main ingredient in feed to an all-time high in August, and cattle futures rose to a record in January.

“Economically, we use price to ration or to increase supply,” says Swanson. “Our supply is that much more constrained.”

The cost of wholesale and retail beef and cattle futures will extend rallies to records amid constrained supplies, Minneapolis-based Swanson says. Feedlots still have made “aggressive” bids for animals, squeezing margins, he says.

Cattle prices rose to a record $1.35/lb. on the Chicago Mercantile Exchange on Jan. 11. In 2012, futures climbed 8.9%, the fourth straight increase.

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