Live-cattle futures look primed to rally—once the industry bucks swelling supply.

The U.S. beef industry is currently dealing with the effects of a severe drought concentrated in the southern U.S. Plains. Ranchers across states such as Texas and Oklahoma are liquidating their herds at historically high rates, as grazing lands and water supplies dry up. That's expected to swell beef supplies in the near term, and keep a lid on live-cattle futures at the Chicago Mercantile Exchange—for now.

But to the chagrin of steak lovers, the glut of beef isn't likely to last.

Starting next year, supplies of slaughter-ready cattle should tighten, providing fuel for prices. Ranchers, who have shrunk their herds, will be left with fewer animals to sell. And since they've been selling off large numbers of young females, or heifers, many will have a smaller breeding herd to rebuild supplies.

"As we go into 2012 and 2013, we're seeing tighter and tighter supplies of valuable cattle to produce beef in this country," says John Nalivka, an economist at Sterling Marketing, an agricultural-advisory firm in Vale, OR. The fact is, we've continued to reduce the inventory, and we haven't been building herds."

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