Beef and cattle prices increased to new record levels in 2011 and are expected to push even higher in 2012. Several years of declining cattle inventories culminated in late 2011 with a projected 3% decrease in slaughter that combined with lighter carcass weights to result in 3.8% less beef in the fourth quarter of 2011 compared to a year earlier.

For 2012, slaughter is forecast to drop another 5% or more; even with an expected increase in carcass weights, we can expect a nearly 4% drop in beef production for the year. Decreasing beef production ensures that wholesale and retail beef prices will be pushed even higher in 2012.

Cattle supplies that are even tighter, on a relative basis, likewise ensure that fed and feeder prices will be pushed to the limit and maintain strong negative pressure on feedlot, packing and retail margins. Weather conditions that determine whether the drought in the South continues or abates will determine whether feeder cattle supplies remain merely very tight or move to extremely tight should heifer retention accelerate in 2012.

While supply is clearly the main driver pushing cattle and beef prices upward, it is consumer beef demand that will determine just how far prices will go. It is not really a question of whether prices will be higher but rather a question of how much higher.

Domestic demand is the biggest unknown in 2012. Consumer demand for beef is a combination of "willingness" and "ability" to purchase a given quantity of a product at a given price. Typically, when nothing else changes, consumers will pay higher prices when quantity is less and will only purchases greater quantities at lower prices. Declining beef production in 2012 already suggests higher prices for this reason.

However, other factors can change that affect the overall level of demand. Among the "willingness" factors for beef is the underlying desire that consumers have for beef. There is no significant indication that consumer preferences for beef have declined. Even as consumers have been forced to adjust spending patterns in recent years, beef preferences remain strong.

However, “beef” is many different products and there are questions of whether consumer preferences have changed in terms of the mix of beef products desired. Steak may be viewed by consumers in today’s economy as more of a special occasion meal, while ground beef demand continues to grow, including demand for premium ground beef products. It will take time before the extent and permanency of these apparent changes in preferences is determined.