MCHENRY, Ill. — Improving pasture conditions and strong cattle feeder prices are providing opportunities for cattlemen to begin rebuilding the U.S. cowherd.

“There is light expansion going on with the nation’s cowherd,” said Rich Nelson, chief strategist with Allendale Inc. in McHenry. “Nine of the top 12 beef cow states have seen moisture return, so there is an incentive to expand based on moisture and calf prices.”

This expansion also is indicated by the lower number of slaughter levels.

“The beef cow numbers have been down double digits for several months compared to last year,” Nelson said.

“It appears to me that in late 2013, we are beginning the process of herd rebuilding,” agreed Derrell Peel, livestock marketing specialist at Oklahoma State University. “That is based on indications rather than confirming data, but I think it’s happening.”

When the cattle inventory report is released by the U.S. Department of Agriculture in January 2014, Nelson said, the heifer retention will likely increase 1 percent over the 2013 number and possibly include a 2 percent increase.

“We will see some expansion in the next cattle inventory report,” he added.

“Forage conditions are significantly better in a number of places,” Peel reported. “Although, there are some areas that still have fairly severe drought and quite a lot of areas that still have marginal to moderate drought conditions.”

And, Peel said, hay production in 2013 increased significantly and recovered from the low levels that were produced the previous two years.

“We’ve been ready to expand for the last three years, but the drought has postponed it and forced additional liquidation that was contrary to what the market incentives were,” he said. “There is no doubt the feeder cattle market is providing incentives to expand, but the question as we go into next spring is if Mother Nature will cooperate and let us follow through.”

As cattlemen retain heifers for their herds, this will further tighten an already-smaller supply of available feeder cattle.

“We finished weaning calves one to three months ago depending on the region of the country, so these guys have made their fall sales and their decisions on heifers,” Nelson said. “I expect a 2 to 3 percent reduction in available feeder calves.”

Typically by the end of the year, there is a decline of feeder prices from the fall highs toward the spring low in prices.

“For the feeder cattle index, which is a measure of the cash feeder prices in sale barns, we just posted a new high on Dec. 16 at $168.32, up from the high in November of $165.50,” Nelson said.

“It will continue to be a challenging year for the feedlot and packing sectors in 2014,” Peel predicted. “Those sectors have had many years of excess capacity, and they have increasingly struggled over the last couple of years.”

The large corn crop produced in 2013 is a positive aspect for the feedlot operators.

“Feed prices will be somewhat more friendly in the next 12 months, but the relief cattle feeders will get from lower feed prices will be offset by higher feeder cattle prices and limited feeder numbers,” Peel said. “This will be a challenging year since feedlots will have difficulty in maintaining numbers, and they have already paid record high prices for feeder cattle this fall.”

On a live weight basis, the specialist said, average cash fed prices will range from $131 to $134 for the year.

“It is possible we may see seasonal peaks of $135 and perhaps as high as $140 in the late February to mid-April time frame,” he said.

“We have a unique situation in front of us for the next three months because we had some very low placements, so we’re going to have some very tight slaughter numbers in February and March — as much as an 8 percent decline in slaughter,” Nelson noted. “So we’re calling for $140 February cattle, which is much more than the market is pricing now.”

He then expects a normal seasonal decline in cash cattle prices in the summer to $125 and then a rebound at the end of the year to $134.

“If the cattle market hits $140, that would be a new record,” the strategist noted. “But it will only be for a short time.”

“But a lot of feedlots will face breakevens that are higher than that based on the prices they paid this fall for feeder cattle and particularly if they’re struggling with volume in order to run their feedlots efficiently from a volume standpoint,” Peel said. “Even $140 fed cattle price probably isn’t enough to ensure profitability for feedlots.”

Beef exports were strong in 2013.

“I’m very surprised by how well we’ve done this year,” Nelson said. “We’ve had lower beef production and yet a 4 percent increase in exports.”

Exports of U.S. beef are up in Japan, Mexico and the Asian countries, the strategist said.

“The drought in Mexico the last 1.5 years has decimated their cattle herd, so they need beef now,” he said.

“While there are problems in mainland China due to trade disputes, exports of beef to Hong Kong are up 129 percent compared to last year,” he added.