In the last INSIDER, we discussed USDA’s realignment of beef quality grade evaluation through camera technology. The adjustment brings adversity, but the industry must accept it as a necessity for the goal of accurately delivering on end-user expectations for marbling and eating satisfaction.
Fourth-quarter beef pricing is quite sensitive to quality grade price spreads, traditionally focusing on increased demand for Choice, Premium Choice brands such as CAB, and Prime middle-meats. Given the timing of the grading assessment changes in the last 30 days, many market participants have logically considered the price reaction in these quality spreads. The first chart (above) shows that the Choice/Select spread normally widens in late November, into December with a move into the $15/cwt. range a year ago. Current season data shows a weekly average Ch/Se spread from $10.40/cwt during the week of October 30th to $17.58/cwt. for the week of November 20th, and $21.43/cwt. for the quote yesterday. That suggests a combined seasonal impact with a likely added effect due to a slightly smaller percentage of carcasses reaching the Choice grade than expected. USDA data shows little more than a 1 percentage-point decline in Choice the week of November 20th vs. the same week last year.
The share of those Choice carcasses certified into Premium Choice brands made a notable 3-point decline during the first week of November, down from 29.2%, but quickly recovered in the following two weeks on further adjustments to 28.8% in the latest report. We follow this with a look at the price spreads between CAB and Choice product in the second graph, pointing out that cutout values for CAB have reacted with an increase from $9.50/cwt. to $11.10/cwt. but at a level decidedly more subdued than in 2016. Buyers are presented with a more tolerable premium structure than a year ago for those committed to the quality of the CAB brand at a time when middle-meat sales show aggressive price spreads when singling out ribeyes and tenderloins from whole-carcass cutout averages.
The market behaved much as expected in the shortened business week of Thanksgiving, its smaller federally inspected harvest at 572K still 4% larger than that week a year ago. The mixed cash fed-cattle trading range last week showed the Southern Plains developing a market at $118/cwt. on Tuesday and no trade in the north until Wednesday, when the North established a market at $120. We’ll call the market average at $119/cwt. last week for the second week in a row. Surprisingly, the bearish Cattle On Feed Report from a week ago last Friday did not have as much negative impact on Live Cattle Futures as we might have thought: contract prices were lower on Monday but rebounded fairly well on Tuesday and Wednesday.
The holiday-shortened week resulted in a report of CAB carcass cutout values on Wednesday instead of the normal Thursday schedule. There was disparity in price movement across the differing beef quality levels, the CAB cutout quoted higher by $1.40/cwt. while Choice was down $1.10/cwt. and Select lower by $2.30/cwt. That increases the spreads between each, yet keeps the CAB cutout premium lower than a year ago for beef buyers. (For more details on these spreads and the growing premium paid to producers for qualifying cattle, see section and graphs above).
It appears that while rib values were down a bit the week prior, buyers got back in the saddle last week with demand increasing values especially for the heavy CAB ribeyes, bone-in and boneless. Higher prices across the rib placed a solid positive on that primal to generate an $8.94/cwt. increase on CAB ribs for the week. The loin followed suit with tenderloin butts bringing on an increase of 74¢/lb., slightly above the 2016 price though below the 2015 price for the same week. Tenderloins were also higher by 40¢/lb., that $12.85/lb. coming in $1.15/lb. higher than this week a year ago and 65¢/lb. higher than in 2016, yet not as high as the “same week” values of 2012-2014. Short loins were up 22.5¢ right in the middle of the 5-year average, while strip loins saw less demand with a marginal price decline and typical lack of regard from buyers this time of year, pricing at $5.93/lb. wholesale.
Across the chuck complex, flat irons surged to their highest price of the year at $3.58/lb., that “value cut” establishing a more defined demand increase in this year’s 4th quarter than in the last 5 years of more erratic progress. Teres majors were up 17¢/lb. last week and chuck flap coursed higher to $6.86/lb., responding to its unique demand. The round complex saw little movement, but for higher knuckles, goosenecks and outside rounds. Thin meats were primarily priced softer, as were CAB grinds.
CAB Premiums Paid Trend Higher This Fall
Accompanying the focus on end-product cutout values is the bar chart focusing on a return to more attractive CAB premiums paid to feeders for qualified carcasses. The input side of the packers’ equation is not exempt from simple supply-and-demand fundamentals, and we see that in seasonal differences on the fed cattle side as well. A return to a weekly average CAB premium above $5.00/cwt. is punctuated in the most recent USDA report with the high end of the packer-reported premiums at $9.00/cwt., further emphasizing the seasonal opportunity for feedyards and their cattle feeding customers to capitalize on high-quality cattle to boost their bottom line.