MLA says the high Australian dollar, US beef's return to North Asian markets, ongoing drought and rapidly rising farm costs are now expected to keep the cattle herd and beef supply steady over the short term.

In launching the report yesterday, MLA's chief market analyst Peter Weeks said that while there is reason to be optimistic over the medium to longer term, the coming 12 months could remain challenging for large segments of the cattle and beef industries.

"Returns to medium to large northern cattle producers not in drought are expected to remain favourable, while many medium to small southern cattle producers suffering drought and rising costs will face further losses," Mr Weeks said.

"If the drought recedes, we could see a more general recovery in grazier and feedlot incomes, to attractive levels, driven initially by improved on-farm productivity and the elimination of drought related costs, and eventually also by beef price rises.

"The promise of a good winter grain harvest, following on from the bumper summer sorghum crop, is expected to provide partial cost relief for producers and lot feeders from spring.

"However, with global grain prices remaining high, the shift from grainfed to grassfed beef production seems likely to persist over the next few years."

Nationally, the herd is forecast to remain at around 28 million head until June 2009, before commencing a slow build up to 29.5 million in 2012.

The extension of the long southern drought into a seventh winter, and competition from cropping, is expected to see a further fall in southern cattle herds, offset by a recovery in Queensland herds following flood rains early in the year and some winter follow up rain.

Australian beef and veal production is now forecast to rise 1pc in 2008, due to the ongoing drought-related kills, and fall 3pc in 2009 to 2.14 million tonnes, with lower grainfed beef and cow beef output than recent years.

Quality grassfed beef output should be at least maintained, particularly in the second half of this year, as a result of improved pastures and the availability of steers and heifers left in the paddock due to the sharp cutback in feedlot placements.

MLA says cattle prices seem likely to remain firm over the short term, with expected rises for breeding stock and young cattle likely to offset any falls to export steers and heifers, caused by the return of US beef to North Asia and the high Aussie dollar.