Last week’s federally inspected harvest was the largest this year at 648K head. The annual highs in the number of fed cattle harvested normally occur in May or June. However, we have observed for the past 6 months a large number of cattle placed in feedlots with expected harvest dates in the late 3rd quarter and into the 4th quarter. Perhaps just as important to this looming large number of fed cattle available is the fact that packers are quite profitable now, and their desire has been to increase working hours and maximize capacity. Last week’s price average of $108 was steady on the week prior and upheld by resilient prices in the Live Cattle Futures.
The quality grade trend starting in July has seen both Choice and Prime rates increasing rapidly. Much of the 3rd quarter—July through September—has seen the Choice portion at least 4 percentage points higher than a year ago, with Prime at half a point higher. Identified Angus-eligible cattle moved up to 71% for that period, 6 points higher than last year, the consequences being those large monthly head counts of CAB-accepted carcasses.
A look back over several weeks’ data shows that the CAB cutout price found a bottom, at least for a short time, during the first week of September after a precipitous decline since the year-to-date high mark in mid-June. With prices slipping back to levels seen in 2012, 2013 and 2016 in early September, the downward adjustment has since sparked some buying as we shift toward the 4th quarter. Rib values led the charge in last week’s slightly firmer market with the spot price for heavy ribeye rolls up from $7/lb. the prior week to $7.23/lb.
Technically, that increase was about two weeks early, but we’re splitting hairs for an item that was priced at $10.76/lb. in mid-June, closer to tenderloin than ribeye pricing at that time. Top butts were 10 to 20 cents cheaper last week, depending on item code, and led the weakness in loin pricing, the only primal on the CAB cutout to notch a lower price on the week. End meat prices are firming up with buyer interest, but just gradually on the week. Thin meats were essentially unchanged last week, as were grinds. With October upon us, we should continue to see a steadier to stronger cutout price pattern but possibly up and down a little, which would be typical for this month.
A tale of two spreads
Those who follow beef supply trends know this year stands out for the rapid increase in premium quality beef.
Four inquiries from cattle producers in the past week prompt me to review the realities of fed-cattle value. In the “brave new world” of 70% or higher Choice in the national average fed-cattle mix, it’s natural to hear those hard questions about the future of producer premiums for Choice, Certified Angus Beef ® and Prime carcasses. We’ve just posted the three largest CAB sales tonnage months—August, September and July, in order—as the all-time largest in the history of the brand. Even so, the cutout value difference between CAB and Choice carcasses in the weekly spot market was very close to $13/cwt. last week. Even as production for the CAB brand has outpaced Select production in 21 of the 37 posted weeks this year, demand for the brand has underpinned and supported values for the higher quality beef. Yes, supplies can become a bit more robust than absolutely required some weeks, depending on the season, but the CAB cutout premium speaks for itself. At the same time the Choice/Select spread has traded under $3/cwt. for the past 7 weeks.
That’s a two-factor story. Obviously, a record proportion of Choice beef production can get ahead of demand for this broader category. Secondly, normal seasonality of supply and demand affect this spread. We’re likely to see holiday rib demand pull the Choice/Select spread wider into the fourth quarter again.
The final two inquiries can essentially be summed up in one question: “Do yield grades still matter and should I select for ribeye size?” The one answer is unequivocally, yes. Yield grade is very important and I’d encourage all premium beef enthusiasts to create as many CAB and Prime, Yield Grade 2 carcasses as possible. The USDA grid pricing report suggests that YG 2s are worth a $3/cwt. premium on the average grid while YG 4s garner a net $9.77/cwt. discount. Selection for balanced-trait cattle should always be in style for an attractive bottom line. That applies to carcass traits, too.
Led by demand, CAB sales move onward and upward
The first of October marks the beginning of another fiscal year for Certified Angus Beef LLC., punctuated by the CAB Annual Conference celebration in late September. This also provides an opportunity to check the brand’s vital signs with another line of annual data comparisons.
Steady readers won’t be surprised to see, pending final September data, a 10.3% increase in CAB sales tonnage in fiscal 2017. Growth of that magnitude may be viewed as moderate in many companies but a perspective of the U.S. beef industry suggests fed cattle numbers increasing to the tune of 4% to 6% in any given year is rapid growth.
Consequently, it’s not just increasing head counts that bring our brand sales to surpass a 10% tonnage increase. The 2017 story of yet another record year, with 1.12 billion pounds sold, is highlighted with growth in the proportion of fed cattle that are eligible for the brand (Angus type, black-hided) increasing from 62% in 2016 to 65% in 2017, trending toward 70%. USDA Choice and Prime grading percentages at modern-era records, often 80% combined, suggest strongly that the brand’s “Upper 2/3 Choice” minimum for marbling was achieved more frequently by the more numerous, eligible cattle, resulting in a 29.7% acceptance rate for the year, up 0.8 points on the year prior.
Heavier carcass weights have often been the “go-to” cause of a richer marbling mix over several years, but not in 2017. In fact, CAB carcasses were 14 lb. lighter this (averaging 860 lb.) compared to 2016. Lighter carcasses mean fewer pounds per head, but a small fraction of the increased CAB acceptance rate can actually be attributed to the lighter carcass weight average. That’s because fewer of the heaviest fed cattle missed the brand’s mark with carcasses over the 1,050-lb. limit. There is a well established trend for a former niche brand now accounting for more than 18% of fed cattle.