A USDA feedlot cattle report showed 10.45 million cattle were being fattened for slaughter on July 1, a four-year high for that date and up 3.8 per cent from a year ago.

“The bigger supply now means a smaller supply later. It means fewer cattle in 2012,” Don Roose, analyst with U.S. Commodities Inc said after viewing Friday’s reports.

Feedlots are filled with cattle because a drought in the southwest has killed pasture, leaving ranchers few options other than to fatten the animals for slaughter.

USDA reported 1.695 million head cattle were placed in feedlots in June — up 4.2 per cent from a year ago and the largest June placements since 2006.

More cattle in feedlots means fewer to be put in breeding herds. As a result the cattle herd will keep shrinking, resulting in fewer cattle and less beef next year and in years to come.

In a separate report, USDA confirmed that trend. It said the U.S. cattle inventory, which includes all cattle inside and outside of feedlots plus calves and dairy cattle, was 100 million head, down 1 per cent from 2010 and the smallest July 1 herd since mid-year records began in 1973.

For traders of cattle futures, the inventory numbers were bearish in the short term, but still showed the herd was shrinking.

“We will see a sharp decline in beef supplies for the next three years,” said Rich Nelson, analyst at Allendale Inc.

Frequent droughts in the southwest, high feed costs, a decrease in domestic beef consumption, and cultivation of pasture land for crops have all contributed to this decline.

The smaller herd is at a time when global demand for U.S. beef is strong. Japan, Russia, South Korea and a number of other countries are buying U.S. beef because of better economies and smaller supplies among rival beef producers, analysts said.

U.S. beef export sales are up 35 per cent year-to-date at near 532,000 tonnes.

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U.S. hog producers are not expanding herds as worries about high feed costs have them managing what they have, analysts said Friday after a government report showed only a slight increase in hogs.

The U.S. Agriculture Department showed the hog herd as of March 1 at 63.964 million head, up 0.7 per cent from a year ago. But that increase was largely due to better herd management as more young pigs are surviving to maturity.

USDA on Friday put the breeding herd at 5.78 million head, up 0.5 per cent from a year ago, and the market hog supply at nearly 58.185 million, up 0.7 from a year ago. 

While all of those numbers were slightly higher than average trade estimates, analysts were reluctant to predict an end to the recent surge in hog prices because of this year’s strong demand for hogs and pork. USDA forecasts U.S. pork exports to be up more than 10 per cent this year.

Nearby hog futures are nearing record highs at the Chicago Mercantile Exchange and deferred contracts are even higher. 

“It is slightly negative, if anyone cares,” Jim Clarkson, analyst with A+A Trading, said of the report.

Robust pork exports to Mexico, South Korea, Japan and others have had analysts and traders focused on demand rather than supply.

“I think cash fundamentals will rule the day and the expected increase in exports to Japan will outweigh any impact,” Dan Norcini, an independent hog trader, said.

High feed corn prices have discouraged expansion. Corn costs about $6.80 a bushel now and there are worries it could surpass $7 or even $8 should the 2011 corn crop be hurt by production problems (all figures US$).

“Hog producers are waiting for some signal that feed is going to be cheaper before adding any sows,” said Ron Plain, agricultural economist at the University of Missouri.

Plain noted the report forecast a slight decline in pig litters this year versus 2010, which could mean fewer hogs and higher hog prices in 2012.

Chicago hog futures closed at a one month high on Friday at 92.475 cents per lb and are near the record high for a lead contract of 95 cents set in February.

“Numbers were just a little bit heavier than expected as far as upfront supplies. But we would not think this would impact Monday’s trade at all,” said Rich Nelson, analyst at Allendale Inc.

— Additional reporting for Reuters by Michael Hirtzer.

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U.S. cattle and hog futures closed sharply higher Friday and for the week with the April cattle the highest ever for a lead contract on widespread fund buying and short covering.

Both markets have fully recovered the losses incurred shortly after Japan’s March 11 earthquake. In the days after that disaster, cattle futures lost about six per cent of their value and hog futures more than five per cent.

Fund buying pushed the markets to the day’s highs, but it was cash market events that started futures higher.

In cattle, higher cash sales this week in Nebraska, the No. 2 cattle state behind Texas, at $190 per hundredweight (cwt) on a carcass basis triggered buying in futures (all figures US$). As the futures rose short covering and chart-based buy orders were activated.

“If you were short, would you be happy right now?” said one cattle trader explaining the rush by some traders to buy back short positions.

Since the Japanese earthquake, wholesale beef prices rose to their highest since 2003, cash cattle traded higher from Texas to Nebraska, and Japan was back in the market buying U.S. beef.

Also, Japan may need to buy more beef to replace meat that was either spoiled due to power outages or contaminated by the radiation leaks, said Dan Norcini, an independent livestock trader.

The U.S. Department of Agriculture on Thursday reported Japan bought 3,900 tonnes on U.S. beef last week, the largest sale to any country that week.

While beef demand is strong, the supply may decline, which could force cattle prices even higher, traders said. The U.S. cattle herd is the smallest in more than 50 years and feedlot cattle numbers are expected to decrease in the months ahead.

April cattle futures closed up 2.775 cents, or 2.4 per cent, at 118.600 cents per pound and actively traded June was up 2.975 cents, or 2.59 per cent, at 117.750 cents.

April peaked Friday at 118.650 cents per pound, the highest ever for a lead contract.

Feeder cattle moved higher with live cattle with March up 1.100 cents, or 0.84 per cent, at 131.900 cents per pound and April up 2.225 cents, up 1.68 per cent, at 134.850.

Hog futures advanced, with June contract the highest in a month, helped by this week’s higher pork prices and by talk of pork plants needing hogs to maintain production schedules.

Also, a USDA report on Friday showing a $7.37/cwt increase in the average Iowa/Minnesota cash hog price helped push futures higher. Cash and futures traders speculated that jump in cash may reflect a price increase over a few days.

USDA’s Hogs and Pigs Report, released after the close, appeared to have little effect on Friday’s futures trading. The report showed about one per cent more hogs on U.S. farms as of March 1 than a year ago and a breeding herd about unchanged from a year ago.

April hogs closed up 2.150 cents, or 2.27 per cent, at 92.475 cents per pound and June up 2.525 cents, or 2.5 per cent, at 103.700.

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