CAB Insider: Where Premium Beef Adds Value

Editor's Note: Data in the original version of the story said "CAB brand added $21.14/cwt" this value was actually a per head value. The story now correctly reflects this value as "The CAB brand added $21.14 per head above Choice carcasses in 2018 on wholesale premiums for the chuck and round alone."

With a company mission of driving demand for registered Angus genetics, the Certified Angus Beef (CAB) brand has done just that through carcass specifications that have commanded a premium above USDA Choice and Select. Still, as we look at the carcass primals, not all parts are equal when it comes to adding value. The accompanying graphic shows two sets of numbers depicting wholesale carcass value increases for each primal. Green numbers show the percentage increase for each primal when moving from Select up to USDA Choice, while the red numbers on top of each set represent the next step. That’s the associated percentage increase in value when a carcass qualifies for the CAB brand, compared to Choice. It’s important to note that the green and red percentages are additive as we move up the two steps up from Select to CAB. For instance, the Choice loin complex enjoyed a 10.4% value increase over the Select loin in 2018, plus an additional 6.4% markup when carcasses qualified for CAB. In comparing the Choice-Select price spreads, the middle meats are highly premium to Select (rib +11.9%, loin +10.4%) compared to the end meats and thin meats which receive a much smaller, almost indiscernible premium. CAB middle meat premiums above Choice are very respectable (rib +4.7%, loin +6.4%) but the ability to add value to the chuck, round, brisket and thin meats is unique to the brand in this comparison.

While consumers have long preferred a highly marbled, juicy steak or roast from the rib and loin, the industry struggles to achieve much premium from Choice over Select on the lower priced cuts. This feature is mostly important when considering the chuck and round, which make up more than 50% of total carcass weight. That gives the price bump more impact to total carcass return than on lighter items such as flanks and skirts. The CAB brand added $21.14 per head above Choice carcasses in 2018 on wholesale premiums for the chuck and round alone. All of these spreads get even wider at the retail and restaurant level where marketers adjust margin and pricing for subprimal cuts according to quality grade and brand attributes.

Market Update

Weather conditions have only deteriorated in much of the U.S. cattle feeding industry. As such, the market continues to “build in” a premium for fed cattle into spring as performance expectations moving forward also deteriorate. Last week’s market average was a bit of a disappointment to cattle feeders at a steady $124/cwt., while the futures had a much stronger week.

With the government shutdown continuing this week, we have no carcass weight data to share and no way to know the tonnage we’re producing from fed cattle at this time. That singular metric may not be absolutely necessary to conduct business, but it’s certainly an important gauge as to the currentness of the fed cattle trade and can have more impact on fed cattle prices than one might think.

Boxed beef saw fairly steady trade with a stronger tone late in the week. The Certified Angus Beef cutout value strengthened by just 37¢/cwt. to land at a weekly average of $219.65/cwt. while the Choice cutout was slightly softer, down 48¢/cwt. to average $209.74/cwt. Finally, the Select price was up 27¢/cwt. to average $204.18/cwt. All of this narrowed the CH/SE spread to $5.56/cwt., which is more than a dollar less than the prior 3-year average of $6.86/cwt. for the same week.

Price movement across CAB subprimals was a bit contra-seasonal. Middle meats firmed up last week and end meats declined in value. CAB ribeye rolls rose a bit to $7.77/lb. when seasonal trends should have lent price weakness on into this week before improvement in early February. Similarly, almost every item from the loin complex was pricing higher in the Urner Barry report. Strip loins and top butts, while higher, were very near their position a year ago. Tenderloins, however, saw a real jolt moving up 16¢ to $11.15/lb. when that item is firmly prone to lower demand in January.

It was a mixed pricing week for end meats with the round posting higher values on outsides, eyes and flat/eye combos. The chuck complex summary value was $1.48/lb. cheaper than the week prior, mainly due to lower chuck rolls as every other subprimal was basically unchanged.

Thin meats have been a lightning rod with higher prices the past few weeks and record prices for January percolating to the top on both inside and outside skirts, that upward trend continuing on skirts. Grinds were only steady with CAB chuck at $2.08/lb., round at $2.64/lb. and sirloin at $3.11/lb. All the grinds are extremely cheap compared to the past 3 years, representing a key value buy from the CAB carcass complex at this time.

Valuing the Grid Above Negotiated Base Price

The USDA table illustrating the Yearly LMR (Livestock Mandatory Reporting) Cattle Purchase Type Breakdown for 2018 shows a contrast in feeder-to-packer marketing arrangements for the nation as well as four major cattle feeding regions of the central U.S. It may strike readers as odd that the “negotiated grid” marketing category only captured 3.8% of U.S. fed cattle sales in 2018. The key to understanding that is the word “negotiated.” With regard to grid marketing, that qualifier narrows the spectrum quickly since the great majority of such arrangements use a base carcass price established the week prior to delivery. The feedyard operator is essentially “agreeing” to a price (normally the market average or even the market high) in one week to deliver the cattle for grid pricing the next week; it’s not a negotiated trade since there is no literal negotiation to establish the base. The layperson may read the table and assume virtually no cattle are sold on a grid when in fact, most of the grid transactions are reported as “formula” sales due to the absence of negotiating the price. The other takeaway is that a large number of cattle are traded in the negotiated or “cash” market in Iowa and Nebraska, with a descending share of negotiated transactions as trade moves farther south. Many marketers remain unhappy about the limited amount of negotiated price discovery (especially in the south) even though the national negotiated sales figure has crept up slightly in the past two years. Good or bad, the type of feeding firms in Iowa are primarily farmer-feeders, whereas feedyards become larger as we move south and west through the feeding belt. This suggests smaller feedyards either prefer or are limited to negotiated terms, possibly based on their smaller size and lack of bargaining power. It’s also logical that larger firms prefer formula arrangements based on the regional data.