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Why that steak might cost less in a few years

Beef cattle from Peine Farms in Cannon Falls, Minn.
Jodi Gralnick | CNBC
Beef cattle from Peine Farms in Cannon Falls, Minn.

American cattle herds are adding to their numbers after years of declines, and if the trend continues, it may make that steak a bit more tender on the wallet.

Beef prices have been at historical highs lately, and many are saying that will continue in 2015. But a key figure released at the end of January indicates the pendulum is slowly starting to swing the other way. High prices are spurring ranchers to breed more cattle, and some big ranching regions are getting a bit more rain.

"So it really comes down to grass and profits." said David Anderson, an agricultural economist at Texas A&M University.

USDA beef cow inventories were up 2 percent from a year ago, a jump that surpassed expectations. This is the largest increase since the 1993-1994 season, when cattle herds increased by almost 4 percent, Anderson said.

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Ranchers grow herds by holding onto more of their young female cows for breeding rather than selling them off. It is a sacrifice, but it shows ranchers view the outlook for cattle prices and ranching conditions pretty favorably.

"I think the story is that high prices work," he told CNBC. "Ranchers are expanding herds to meet consumer demand."

Also a good sign is the slightly greener grass in parts of Texas brought by higher rainfall—ranchers just have more grazing land, making investments in larger herds more feasible.

The Lone Star State has the country's biggest beef cattle herd, followed by Nebraska, Kansas, California and Oklahoma. These five states are responsible for half of all U.S. cattle sales, in terms of total value, according to the National Cattlemen's Beef Association. All of them have battled droughts over the last several years, and many areas are still struggling.

"I think the biggest challenge to Texas ranchers is drought," Anderson said. "We aren't really out of it yet in much of the state."

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A drought that began in 2011 hurt herds in Texas and Oklahoma, and another drought that struck Kansas led to a weak corn crop—which cut into feed supplies. These dry spells left cattle numbers tighter than they otherwise might have been, said Jeff Stolle of the Nebraska Cattlemen Association. And California's industry is still weighed down by drought.

Recent conditions in Nebraska have left Stolle cautiously optimistic, but both he and Anderson warned that consumers should expect beef to remain relatively expensive in the near future.

"Generally, by the time a rancher makes a decision to expand a herd, you are looking at a minimum of two to 2 ½ years before you see an increase in beef supplies that will be noticeable to the general public," Stolle told CNBC in a phone interview. "The indications are there, and granting that Mother Nature doesn't get in the way of it, we are going to see a bigger cowherd. But that will take awhile."

The lag time for these types of decisions is longer for cattle than it is for pork, and far longer than poultry, for the simple reason that cows are far bigger and take a longer time to raise, Stolle said.

Other factors could limit production, such as high feed prices. The Kansas drought not only affected the cattle herd directly, it also hurt corn production, and corn is a significant feed resource for cattle.

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But there are plenty of reasons to expect that steak prices won't stay sky high forever.

"It takes a little time because of biology," Anderson said. "Its not like making cars or computers, but more beef is coming and with it lower prices."