Cattle market prices for 2012 should remain fundamentally strong and average 4 to 8 percent higher than in 2011.

However, next year’s market will have the potential for some big price swings.

“Cattlemen will need to search for ways to lower their unit costs of production and ways to enhance market prices in order to achieve profitability during 2012,” says Walt Prevatt, Auburn University Extension economist, in his annual U.S. Beef Cattle Situation and 2012 Price Outlook.

Factors to watch in 2012, says Prevatt, include the current weak U.S. economy, high levels of unemployment, lack of consumer confidence, political gridlock and chaos at all levels of government, an upcoming U.S. Presidential election, and various other issues.

“There is little wonder why future economic uncertainty is fresh in the minds of many U.S. citizens,” he says. “The decisions made on these issues are believed to have an overwhelming effect on business and consumer spending and our future prosperity.

“Unfortunately, there is not convincing evidence about what the future holds. Consumers, at least for right now, are spending less and saving more. Only time will tell if this may be the start of a longer-term shift in consumer behavior.”

Abrupt changes in economic factors could add much volatility to 2012 cattle market prices, he adds.

Turning to beef supply, Prevatt says U.S. cattle farmers are continuing to decrease their inventory of cattle and calves. The major factors responsible for causing cattle inventory declines include a combination of a lack of profitability by the majority of cow-calf farmers (due to weak beef demand which was caused by the severe recession), high production costs (feed, fertilizer, fuel, labor, land rents, etc.), large levels of competing meats, and alternative uses of land (pasture acreage moving into grain production and/or conservation programs and other non-farm uses such as recreation and rural non-farm development).

“Given the current lackluster level of profits and immense uncertainty in the U.S. general economy, cattle farmers will likely continue to liquidate cattle numbers until profitability can be achieved,” he says.

In the mid-year July 1, 2011 Cattle Report, cattle farmers told USDA they had about 350,000 fewer beef cows that had calved (down 1.1 percent) than a year ago. Beef cow replacements were down 200,000 head (down 4.6 percent) from a year ago at 4.2 million head. A decrease in beef cow replacements and beef cows that have calved during 2011 suggests that herd liquidation will continue in 2012, says Prevatt.

A smaller inventory of cattle and calves and smaller calf crop during 2011 will limit beef production during 2012, he continues. USDA projects U.S. beef production during 2012 to be about 25.1 billion pounds (down 4.4 percent from a year ago). This level of beef production will be influenced by any adjustments in average carcass weights and the level of feeder and live cattle imports (from Canada and Mexico).

The 2011 growing season of the major grain production regions got off to a slow start, says Prevatt. Weather conditions hindered planting in most major grain growing areas, and the majority of the crop received average to slightly below average growing conditions during most of the season. Harvest weather is currently adequate in most areas for a timely harvest, he says.

If USDA’s current corn and soybean production forecasts are realized, corn production will be about 0.05 billion bushels larger than a year ago and soybean production will be about 0.2 billion bushels smaller than a year ago.