Many industry participants are aware USDA announced more than two weeks ago that adjustments to camera carcass grading were necessary. The latest generation of camera called Gigabit Ethernet, or “Gig E,” had been introduced last winter and deployed by several packing plants early last summer.
As a track record developed for the new camera over the summer through October, it became evident to some observers that the new cameras were assigning quality grades more generously than the previous models. A “sameness test” was conducted to determine if this was true. USDA concluded that an adjustment was necessary to bring the new GigE camera technology back into alignment.
It is important to know that not all packing firms had switched to the Gig E camera and the consequential impact of the adjustment does not apply to all packing plants. Once the adjustments were announced, some packers elected to discontinue camera use for marbling determinations, at least for now, relying once again solely on the human USDA grader for that judgment call. Since the initial calibration changes to the Gig E camera were made on October 26, an additional set of changes were implemented last week in an ongoing process.
As we compare the three largest-volume packing states for fed cattle, we see that Kansas packers stood the brunt of the impact in week one as compared to Nebraska with some impact and Texas showing nothing negative just yet. That being said, the changes are still fresh that were made a week ago and more weekly reported quality grade data will reveal the true impacts of this situation on grade percentages and CAB acceptance rates. We expect minor supply impacts to the CAB brand at this time.
Last week’s federally inspected cattle harvest at 623K head was a fair reduction on the prior week’s 642K. The fed steer/heifer market ended the huge rally of $12/cwt. over the previous two weeks with a slightly lower average just above $123/cwt. on a live basis. As last week began, market direction was anyone’s guess, but when Live Cattle futures in Chicago faltered early, cattle feeders quickly gave up hope. Carcass weights could move higher as the mid-November reports become available, but at this point we remain 16 lb. under a year ago on steer carcasses at 901 lb. in the latest data. The October Cattle on Feed Report is due this Friday, but the current picture shows fed cattle supplies sufficient but declining through the end of the year.
The unfortunate news for beef buyers was the big run-up in fed cattle prompted packers to run their boxed beef prices significantly higher. The CAB cutout last week was up almost $5/cwt. with Choice up $5.50/cwt. and Select up almost $2/cwt. Some analysts have pointed to the camera grading changes (see above) as a causative factor in packers paying more for cattle, especially of higher quality, but actual impact may be less dramatic than the news.
Without surprise, CAB ribs drove the upward price direction as holiday demand was very much in full swing, and last week’s “lip-on, up” CAB ribeye roll was priced in the wholesale spot market at $9.12/lb., 81¢ higher than the same week a year ago. That price pattern shows an earlier trip out of the gates for ribs this year than any of the previous 5 years. The spike in peeled tenderloin price is virtually straight up since late October, yet the price at $11.92/lb. last week is 77¢/lb. higher than a year ago, though much lower than 2014-2015 at this point.
We’re showing a decent increase on strip loins as well with 0x1 CAB strips up 42.5¢ last week, but they are pricing well within an expected range for this time of year between $5.75 and $6.30/lb. With increases on most items across the carcass, we saw chuck items increase the most on the teres major and arm roast, while flat irons were within reason. Round items saw a 10 to 20-cent increase for the most part with eye of round devalued. Thin meats were steady to just slightly negative last week while flat cut briskets are a bit pricier than in the last two years for this time period at $4.39/lb. One would have to call CAB grinds priced at an expected seasonal value today although not as cheap as a year ago.
Responding to the Market
Wholesale protein buyers have done a fantastic job of responding to the market throughout 2017. The chart shows a classic relationship between price and quantity sold, buyer demand responding with high sensitivity. Note that buyers sat back throughout the runup in comprehensive boxed beef values beginning in late April after steadily staying in the market, building their purchase inventory through the first quarter of the year.
From April through mid-July the load counts were simply pacing along as buyers sat on the sidelines awaiting the price break that began to develop in July. The buying frenzy was kicked into gear during August through early October as all signs indicated beef would not be this cheap again in 2017. Now that we’ve seen a notable up-tick in price over the past couple of weeks, last week’s load count dipped to its lowest in five years for the same week, a normal seasonal low point for beef movement in any year just ahead of Thanksgiving.