CAB Insider: Runaway Prime Percentage Dominates 2018

There have been astounding increases in the Prime grade and to a smaller degree, the Certified Angus Beef  brand and the best combination of the two, Certified Angus Beef brand Prime. ( Wyatt Bechtel )

The evolution of beef quality over the past dozen years has been largely a story of the Choice grade increasing on an unbelievable trajectory, up 20 percentage points (ppt) from just 51% of all federally graded steers and heifers in 2006 to 72% in 2017. That amazing story has stalled in 2018 with the Choice share down 0.8 ppt, yet still record large tonnage this year on a 1.5% increase in the total fed-cattle harvest. That progress now gives way to astounding increases in the Prime grade and to a smaller degree, the Certified Angus Beef  brand and the best combination of the two, Certified Angus Beef brand Prime. Data from the week of November 5th marks a new record national average: 9.8% of steer and heifer carcasses qualified for the Prime grade.

Some readers may recall USDA adjustments made to quality grade lines as determined by instrument grading technology a year ago in early November. Those adjustments, however, should have posed a greater challenge for carcasses at the precipice of the Choice-Prime grade line in 2018 compared to past years, however, rather than lowering the bar. We’ve recently covered the fact that last December’s carcass maturity rule changes—away from the less accurate bone ossification, in favor of dentition—has captured a few more richly marbled carcasses into the CAB brand, and the Prime grade in particular.

Graph

The graph above depicts a supremely higher quality set of carcasses produced in 2018 versus the prior year, and any other year in the modern beef production era. The YTD Prime leap to 135% of 2017 and the CAB increase to 117% of 2017 are impressive. We’ve seen the YTD Prime cutout premium above USDA Branded narrow from $26.80/cwt. in 2017 to $9.35/cwt. so far this year. Similarly, the Prime/Choice cutout spread narrowed from last year’s $32.25/cwt. to $14.21/cwt. in 2018. So far, the robust supplies have negatively impacted grid marketers with a smaller Prime premium, most recently at $9.65/cwt. above Choice, down from $15.87/cwt. a year ago. However, if a quality eating experience means stronger demand as most observers suggest, then beef producers are offering consumers a better opportunity to upgrade their protein selections now more than ever.

Market Update

Federally inspected cattle harvest during last week’s holiday-shortened business was put at 570,000 head, roughly 5k fewer than a year ago. Thanksgiving and Christmas weeks often feature an increase in fed cattle prices, and last week saw such action. However, feedyards held finished cattle in determined hands after a bullish Cattle on Feed Report on Wednesday that featured surprisingly lower feedlot placements for the month of October at 93.9% of a year ago. That’s much lower than analyst expectations and 3% under the 5-year average. Cattle on Feed as of November were fairly numerous at 103% of a year ago, while cattle marketed during October were 104% of a year ago. All of this led to packer willingness to acquiesce on price, paying between $115/cwt. and $117/cwt. in Texas, Kansas, Colorado and western Nebraska. Eastern Nebraska and Iowa apparently had larger supplies of finished cattle to work through as successful bids in those areas were around $114/cwt.

The week of November 5th was a highlight for beef quality as the share of fed steer and heifer carcasses grading Prime hit a record high 9.81%. So far this calendar year Prime supplies have run 135% of 2017 and Certified Angus Beef brand supplies are 117% of 2017 (see section above).

Chart

Last week’s boxed beef market was a quiet one with the Thanksgiving holiday in the mix. The CAB cutout value was essentially unchanged but up 21¢/cwt. for the week. All CAB rib items were slightly lower with ribeye rolls down 6¢ at $9.40/lb. The loin primal only saw positive price direction from top butts and tenderloins. The former are enjoying a nice run on demand with increasing prices since early October, just like last year, but entirely the opposite of 2015 and 2016 when 4th quarter top butt prices softened. Tenderloins were 12¢/lb. higher than a year ago, their $12.98/lb. coinciding with last year’s 4th-quarter high in early December. Chuck items were mixed with teres majors up a tick to $4.43/lb. but closer to their annual low than the highs. Arm roasts were the only other chuck item seeing a price increase, though still cheaper than a year ago and at a relative discount today. Round subprimals were further discounted last week with mixed prices for thin meats.

Shipping Matters

Selling fed cattle means considering several details, one of which is shipping cost. The industry standard for cattle sold “live” requires weighing at the feedyard with the packer paying freight to the plant. By contrast, cattle sold on a value-based grid are not weighed until the carcass goes across the “hot scale” at the packing plant to arrive at a hot carcass weight (HCW), which is used as the final sale weight. In the latter case, the feedyard normally pays freight to the packing plant and also stands any carcass yield (dressing percentage) risk. Feedyards located farther away from a plant consequently must calculate shipping charges against their potential grid marketing premiums. Some feeders opt to transfer both opportunity and risk to the packer, saving freight and settling for a flat cash bid for the pen. While there are positive aspects to selling live, feeders facing long distance shipping need not dismiss grid marketing categorically

Analysis using 2018 fiscal USDA grading data and YTD average grid premiums and discounts (no allowance for discount thresholds such as % YG 4s) suggest delivering a load of just average steers for quality and yield grades can negate most of the shipping cost up to 200 miles. The math on that “average” pen places the grid premium at nearly $26/head, using the 2018 Choice/Select spread of $11.20/cwt. Solid data for anticipated overweight (above 1,050 lb.) is harder to come by, but a conservative estimate of 5%, for the sake of argument, lowers the premium per head to near $20/cwt. While the freight bill on a standard twin-axle trailer is about $800 for a 200-mile trip, the shipping cost comes to $23/head.

The net negative $3/head can be overcome with no problem at all. The easiest way to beat industry average is to sort pens of finished cattle into optimum marketing groups with two or more harvest dates, thereby decreasing YG 4 carcasses to perhaps 5% and almost eliminating overweight discounts. Reserve grid marketing for cattle that can achieve higher quality grades and CAB acceptance to increase profitability. Bumping the Prime carcasses from 8% to 15%, CAB carcasses from 33% to 55% and the Choice share from 72% to 80% nets $45/head more income across the pen than average, covering the freight differential and adding $22/head to the bottom line on these long-haul finished cattle. The caveat remains that all packer grids are not created equal, nor are all pens of cattle. As well, some packers have extended a freight allowance to feedyards marketing on a grid. With all of the above in mind, running the “what if” scenarios is a worthwhile endeavor for feeders with shipping distance to cover.

Chart 2

Comments