CAB Insider: Seasonal Decline in Quality Grades

Spring beef markets tend to be predictably unpredictable in the past few years with extremes in price, cattle supply and quality grade changes. Feedyard managers and packers are keenly aware of the heightened supply/demand sensitivity going into May, but to dissect that a bit, the fed-cattle supply today has transitioned to calf-feds finishing with the fewest days on feed of their contemporaries in the 2018 spring calf crop. Like clockwork, USDA carcass quality grades are rapidly declining as marbling levels adjust lower, concurrent with the seasonal change in supply. 

choice spread

This doesn’t suggest high quality calf-fed cattle cannot achieve Premium Choice (the minimum requirement for CAB) and Prime grades in May, because we’ve seen enough data to prove otherwise. Even so, the earliest spring calf-feds harvested tend to suffer lower marbling degrees than the yearling cattle that graded so well in February and March. The accompanying charts clearly show the magnitude of decline in Choice and Prime carcasses over the past five years (3.8 points on average) from the 7th week to the spring low. In each of those years the spring low grade came in the 2nd or 3rd week of May, except for that in late April 2016. Data through April 15th, just two weeks ago, pegs the 2019 decline then at 3.34 points. With the lower fed cattle combined with violently lower live cattle futures last week, look for feeders to be willing sellers and packers to ramp up harvest head counts as they experience widening margins and need to fill May beef demand. These factors likely will combine to allow quality grades and CAB acceptance rates to chase the seasonal decline lower into mid-May. That should widening the Choice/ Select spread beyond Monday’s $15.42/cwt. and provide a firm Choice grid price on top of which are built the premiums for CAB and Prime carcasses.

Market Update

The federally inspected cattle harvest last week was larger again with 643,000 head, up 2,000 from the week prior and 15,000 more than a year ago. Fed cattle supply and demand is balanced for the moment with a YTD increase in fed cattle harvest of 1%. Fed cattle prices were also relatively stable last week, but for a $1 decline in live cash to average $127/cwt. on the week. The Iowa/Minnesota market at $128/cwt. to instances of $130/cwt. remained premium over a $126/cwt. value in the Southern trade. Moving ahead to May, we should see an increase in fed cattle numbers with some of the largest harvest weeks of the year typically occurring in late May to June.

Carcass weights are a big part of the supply story now as fed cattle weights stopped declining at the rate most market observers expected just a month ago. Steer weights in the latest report declined just 1 lb. to average 864 lb., just 3 lb. lower than a year ago. Heifer carcasses were down 2 lb. last week, but up 1 lb. over the same week a year ago. That’s quite an about-face from the weeks-ago heifer weights 15 lb. lighter than a year ago. This adjustment to carcass tonnage will add up to larger total beef supplies than the market had anticipated. CAB steer/heifer carcasses at an average 852 lb. for the week beginning April 8th were 2 lb. heavier than that 2018 week.

UB5119

Overall steer/heifer quality grades declined in seasonal fashion, but a bit faster than normal in the past two weeks with almost a 2-point decline from 73% Choice down to 71%. The Prime share of steer/heifer carcasses was down from 10% to 9.3% in the same period. The combined Choice and Prime grading rate remains above a year ago and at modern-day record levels. CAB acceptance slipped from 5 weeks at 39%-40% to a range in the past two weeks of 36% to 38%.

Beef cutouts backed off last week after two weeks of increases. The CAB cutout was down $2.53 to average $237.57/cwt., still a wide margin of $11.99/cwt. higher than 2018 and only surpassed for that week in the past 5 years by the supply-restricted 2015. The quality spreads are typical for April with the Choice/Select up to $10.31/cwt. and the CAB/Choice spread at $8.69/cwt., well within expectations but much lower than last week’s $12.69/cwt.

CAB cutout details show middle meats still riding spring demand higher with the loin up $10.18/cwt. Most loin subprimals were steady or higher, the steepest increases on short loins/strip loins. Tenderloins may have found a bottom as the spring declines abated last week. Tri-tip demand is out of the gate on time with wholesale spot prices much higher than year ago at $4.13/lb. versus $2.93/lb. the same week last year.

Seasonal low

 

The Impact of That Shift in Live Cattle Futures 

Last week’s tumultuous correction in Live Cattle futures contracts has implications for the short and long-term markets. The immediate primary impact is the basis shift, pitting last week’s average cash price of $127/cwt. at a wide premium to the June Live Cattle contract trading this Wednesday in the $114/cwt. range. The marketplace had been well informed heading into this period that funds had built a sizeable long position with record volume, ripe for a shakeup once any futures weakness reared its head. Most of the damage was done in two brief days, last Wednesday and Thursday, but the total decline from April 18th through this Tuesday’s close was near $9/cwt.

live cattle future

In the short term, cattle feeders have already become willing sellers at much lower values early this week. Given weather conditions and feedlot placements, we’ve known the finished cattle supply would become quite large in June—and that becomes more fodder for further negative market sentiment, regardless of any strength in boxed beef values, which seem disconnected from fed cattle prices currently. Feeders placing cattle in the feedyard in the past few weeks with hedges put in place prior to the futures break are in good shape and may have already pocketed profits if not literally, at least on paper. Breakeven purchase prices for cattle procured in May will be impacted as well because, unfortunately for sellers, feeder cattle sales will reflect the shift. The value of a 750-lb. steer projected against the October Live Cattle futures just devalued by about $100 in what seems like the blink of an eye.  

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