Passing The Test: Several weeks ago, I received an email that asked: “I am wondering how you explain the difference between the cash in the North versus the South? Is it grade? The choice select spread has not been wide. Is it supply? Or is it because the north actually negotiates the price?”
And so, I played along. I emailed back, “Must be the last one, right? “ To which I received the following response: “Correct.” I passed the test.
But aside from that, there are two parts here that are important: 1. cash trade, and 2. price spreads.
#1 Cash Trade: I’ve written on the topic any number of times – the premise, “more trade, better prices” isn’t backed up by the data. Most recently, I covered the topic in this column: More Trade = Better Prices (Not So Much). Since 2005 through mid-2024 (1,002 weeks), “…the difference in negotiated trade explains just north of 5% of variation in cash prices. That is, 95% of the variation in weekly cash price is driven by other factors.”
#2 Choice/Select Spread: What really caught my attention was mention of the spread. Let’s explore that a little further.
The first graph details weekly spreads for the year from USDA’s Comprehensive Cutout report. There are several items of note. First, the Choice/Select spread was $20/cwt the week I received the email. Moreover, it had been steadily widening in the preceding weeks and stood at its widest point since just after Christmas. Second, note also the Branded/Choice and Prime/Choice spreads: $10 and $22, respectively. They also were widening. That directional change plays an important role in weekly pricing (it’s not today that matters, but rather some anticipation of where the beef market will be).
Volume Difference: But it’s not the magnitude of the Choice/Select spread that’s important here. More significant is the question of why the measure even remains a benchmark of market indicators (e.g. USDA regularly features it in their National Daily Cattle and Beef Summary).
The second graph provides some context. The chart provides Jan-thru-June percentages of cattle landing in Select, Choice, and CAB-plus-Prime categories, respectively (all derived from USDA’s Grading Dashboard).
Several things of interest:
1. Commodity Choice has remained relatively steady (the average since 2011 is 41% - ranging from 37-to-45% on an annual basis). However, the mix around that flat line has dramatically changed over time.
2. Select volume has steadily slid from 28% to 13% of the slaughter mix.
3. CAB-plus-Prime volume has wholly replaced the difference increasing from 20% to 35%.
In other words, the Choice/Select spread represents roughly only one-out-of-eight head – while premium grading cattle are nearly triple that volume and make up more than 1/3 of the total slaughter mix.
Rearview Mirror vs Windshield: Several months ago I wrote a column entitled: Beef Quality Driving The Business. I noted that: “Prime and Branded sales account for 60% of the new dollars coming into the business since 2005. Even more impressive, sales for the Prime and Branded categories own annual growth rates exceeding 14% and 10%, respectively, during that time…[Marbling is] the difference maker when it comes to consumer satisfaction, subsequent spending and the total dollars available to the industry.” And I also mentioned, “It all starts with the cattle.”
That brings us back to the beginning. Neither commodity Choice nor Select is driving the business. And so, as it relates to spreads, the Choice/Select spread is increasingly irrelevant in the marketplace. It’s where we’ve been – the equivalent of looking in the rearview mirror.
Conversely, the true threshold of value differentiation is Modest-or-better marbling. That’s the better cutoff in terms of determining margin contribution. And thus, the windshield view of the business.
Nevil Speer is an independent consultant based in Bowling Green, KY. The views and opinions expressed herein do not reflect, nor are associated with in any manner, any client or business relationship. He can be reached at nevil.speer@turkeytrack.biz.
