* USDA cattle herd down about 1.6 pct yr-over-yr * Cattle herd remains lowest in 61 years * Ranchers begin retaining breeding stock * Record high beef prices seen through 2014 By Theopolis Waters CHICAGO, Feb 1 (Reuters) - The U.S. cattle herd shrunk for a sixth straight in 2012 due to high feed costs tied to drought and that should mean consumers will continue paying record high prices for beef. The U.S. Department of Agriculture on Friday said the U.S. cattle herd as January 1 was 89.30 million head, down 1.6 percent from a year earlier and the smallest U.S. herd since 1952. Analysts expected a 1.8 percent decline. However, the data suggests ranchers are beginning to retain female breeding stock, the foundation for herd rebuilding, possibly in anticipation even higher cattle prices. "Ranchers are retaining heifers because of record prices for feeder cattle and the futures market is saying we're going to get higher," said University of Missouri livestock economist Ron Plain. Friday's herd inventory results also reaffirms results issued in the government's report in July 2012 in which the U.S. cattle herd at the start of 2012 was 2.3965 million head larger than 60 years earlier, but dropped below that level around April 2012. U.S. cattle numbers have declined for several years as producers have encountered a number of hardships including mad cow disease that reduced U.S. beef exports for several years, a recession that hurt domestic beef consumption, a lengthy drought that damaged pastures, and record high feed prices. Those who raise, feed and process cattle in the central and western U.S. Plains this year felt the heat from the worst dry spell in more than 50 years. It raised feed and hay costs -- main staples in cattle feeding -- to all-time highs last summer. Chicago Board of Trade corn futures in December averaged $7.24-1/8 per bushel, the fourth highest as drought damaged the crop. Prices reached a record high of $8.43-3/4 on August 10. The smaller cattle herd has increased retail beef prices, with a record high of $5.15 per lb set in November 2012. That slipped to $5.11 the following month but was still up from $5.01 a year earlier. HERD SIZE MAY BE TURNING Still, Friday's report showed that heifers earmarked for the beef breeding herd were up nearly 2 percent from a year earlier, raising eyebrows among analysts who had expected a 0.4 percent decrease. The increase may indicate that the herd contraction is about over. "Normally, that would mean some measure of expansion, but I believe there are people waiting for the feedlot demand to pick up," said Rich Nelson, chief strategist with Allendale Inc. Feedlot owners, who fatten young cattle for sale to packers, struggled to be profitable as elevated feed costs and record-high prices for incoming cattle eroded margins. Last month, feedyards on average lost $121 per head on cattle, which was about steady with losses in November. In December 2011, the average loss was of $70 per head, according to the Denver-based Livestock Marketing Information Center. Beef packers also fought to maintain market share and plant efficiencies, with Cargill Inc shutting down its Plainview, Texas, beef processing facility due to tight supplies. Typically, Chicago Mercantile Exchange live cattle futures traders do not regard the government's semi-annual cattle report as a "market mover." Instead, they see it as more of an forward view of cattle production over the next three years. On Friday, most-actively traded April live cattle closed at 132.175 cents per lb, down 0.600 for the day. However, Plain viewed the calf crop data as "slightly bullish" for 2013 CME live cattle futures contracts, confirming traders' long-held beliefs of fewer cattle this year. USDA reported the latest calf crop at 34.279 million, down 2.9 percent from a year earlier, and the smallest since 1949. In July 2012, USDA had predicted that calf crop at 34.5 million head. Fewer calves born last year is a bullish number, said Plain. "From a cattlemen's standpoint, they like what they see on calf prices, they just wish they had more grazing grass for their cattle," said Plain. Consumers should brace for record high beef prices this year and in 2014. Not until 2015 are those prices expected to come down when more cattle become available, analysts said.