Past Is Prologue: My previous column highlighted some of the changes that occurred as producers rebuilt the cowherd from the 2014 inventory lows. Most notably, the rebuilding process established the foundation for more cattle qualifying for an A-stamp AND simultaneously achieving modest-or-better marbling (hence attaining Premium Choice or Prime quality grades).
Most important, though, is the look ahead. The column noted that, “Market signals are driving the supply chain to become even more channeled and intentional in order to secure beef demand and facilitate value to consumers.”
Price Spreads: With that, let’s turn to the broader wholesale beef market. There’s one take-home message from the data presented below: price spreads are getting bigger over time!
- The first graph highlights the average price difference between Prime, Branded and Select cutout values versus Commodity Choice.
2. The second graph provides more granularity. In fact, at its widest point in 2022, the difference between a Prime and Select carcass was roughly $120/cwt. That’s equivalent to ~$1100 disparity for a 900 lb carcass.
The trends reflect diverging demand functions across the categories.
The spreads are increasingly rewarding growing supply of Prime and Premium Choice, while discounting shrinking supply of Select.
Grid Pricing: All of that translates to grid pricing. Widening spreads ultimately work their way into various grids. The manifestation varies depending on how the premiums and discounts were initially negotiated; some grids are static, and some grids roll with wholesale market pricing to some degree (and some more than others). (Paul Dykstra, Certified Angus Beef, provides an outstanding overview of this topic in his recent CAB Insider column.)
And average grid premiums / discounts are likely to get even bigger in 2023. That following 2022’s record-large spreads and subsequent contract negotiations going into the new year.
Whatever the arrangement, the differences represent real opportunities for cattle producers. That was the focus of a previous column entitled, Real Money For Real Value. The overall premium (above selling cattle on live market) across more than 16,000 head of cattle was $140/head. And several lots, last fall, earned nearly $500/head above the base market!
Market: Beef is not fungible – and neither are cattle. As alluded above, the market is essentially forming differentiated demand functions across quality grades.
Given that reality, why would / should the business ever regress back to selling some fixed, pre-determined percentage of cattle on a live basis? Market mandates are regressive (not to mention intrusive), commoditize the business and antagonistic towards how consumers are voting (with their $$) in the marketplace. (see Marbling Is The Anchor)
Real Dollars: Ten years ago, I published a white paper that ended with the following observation:
By [implementing better genetics and management] the beef industry becomes more effective, responsive and ultimately establishes a virtuous loop: production of higher-quality, more desirable products establishing better consumer demand – and in turn, better consumer demand creating the need for even more beef.
Ultimately, consumers call the shots. As noted above, the supply chain is increasingly “…channeled and intentional in order to secure beef demand and facilitate value to consumers.”
To that end, market signals – real dollars - associated with beef quality and beef demand will likely become even stronger in coming years. That has broad implications for the business – and will prove especially important in forming the foundation for the next rebuilding cycle.
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.
