Drought Lives on in Beef Prices

The U.S. Department of Agriculture reported Friday that after the worst drought in half a century, the corn and soybean crops are not quite as bad as feared. Production and yield estimates have been revised up from October, and crop prices are now expected to fall.

Drought Lives on in Beef Prices
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But the damage has been done, at least to the beef industry.

"Cattle prices are raised for both 2012 and 2013, reflecting tight supplies of fed cattle," the USDA reported.

It projects wholesale steer prices next year could hit $1.33 a pound in 2013, 16 percent higher than 2011 prices.

The drought in the Midwest came a year after a severe drought in Texas, which made hay a valuable commodity. Ranchers have spent much of the last year thinning their herds. Texas, the largest cattle state by far, has seen its herd shrink by 11 percent this year, according to Cattle Feeders Annual.

That glut of supply may now have ended.

(Read More: Breakfast in America: The Real Cost of Corn.)

At a cattle auction Friday in Athens, Texas, business was light.

"Probably lucky to get 1,000 head of cattle here today," said Jesse Carter of the Livestock Marketing Association. "Typically these guys would run well over 2,000."

Fewer cattle in the production chute means higher prices next year for consumers. The USDA said total domestic beef production in 2013 is projected to be 24.5 billion pounds, down from an estimated 25.6 billion this year. Prices are very high.

"There is no real incentive for us to keep these critters a day longer than we need to," said Paul Donisthorpe of Corazon Cattle Co. in Athens. He's selling young steers for $783 a head.

"I can take the $783 and buy a short-bred cow in New Mexico and haul her to Texas where she won't starve to death, wean a calf in 9 months, sell it for $500 and mama for $900 — nearly double our money," Donisthorpe said.

(Read More: Seeking a New Startup Idea? Try Farming.)

Also helping ranchers is better weather in the Lone Star State, which has meant more hay at lower prices.

"Last winter we were paying $90 for big round bales of hay," Donisthorpe said. "This year we have laid in hay for the winter at $55."

Not everyone is making money. Beef processing margins could be the worst in years, with packers losing on average $43.78 a head in 2012, according to Stephens Inc. It's even worse at the moment, as cattle which went to feedlots in June are now being processed at a loss of $149 a head. Part of that is blamed on lighter demand after Superstorm Sandy knocked out power to much of the Northeast. (Read More: Sandy-Torn Northeast Deals with 200,000 New Outages.)

Ranchers are trying to extract even more on the margin by bypass auction houses. Corazon Cattle Co. has started selling animals on Craigslist.

"We are delivering some purebred heifers down toward Waco on Saturday for $1,800 per head, which is at least a $300-$400 premium per heifer from what we would receive at auction — with no commission," Donisthorpe said.

As for the future, Livestock Marketing Association's Jesse Carver thinks the stampede to thin herds in Texas has peaked, but it could take three to five years for ranchers to rebuild inventory. A few people at Friday's auction at the Athens Commission Co. were there to buy replacement cows to replenish their herds, but "they're doing it very cautiously, very slowly."

—By CNBC's Jane Wells