Wide spread change
By: Paul Dykstra
The price spread between Choice and Select has been lackluster since 2008, but that’s not all bad, considering the dynamic change it sparked.
Retail and foodservice companies began to see they could offer higher quality beef at a competitive price. As a result, price-sensitive meat case managers and chefs have been more apt to trade up to Choice and better products, satisfying customers and winning repeat business.
For feeders and sellers of higher quality cattle, the narrow Choice/Select spreads seemed to devalue their higher grading cattle. But they were building a demand base. Packers continued to seek richer grading cattle in their weekly buys, knowing their wholesale customers were hungry for the better beef only now within reach for more and more of them.
Some interpreted the narrower Choice/Select spread as a lack of demand for highly marbled beef, perhaps a change in preferences. However, a closer look at the trends in USDA carcass grading over the past five years bring the issue into sharper focus.
We’ve maintained a strong supply of fed beef in the U.S. through an era of dwindling cow numbers and, for various reasons, the share grading Choice or higher has dramatically improved (Figure 1). The law of supply and demand has consequently pressured the historically expected Choice premium.
Still, an increased supply of highly marbled beef, including premium Choice, Prime and the Certified Angus Beef® (CAB®) brand, does not equate to a decrease in demand. In fact, over the past couple of years, the combination of greater quantity and quality enticed two of the largest U.S. beef retailers to add premium Choice to their selections in the meat case. Another went so far as to offer Prime.
The summer of 2011 may have seen the first manifestation of reduced calf supplies as a result of drought-related culling in Southern states that has ramped up since 2010. (Obviously, if this is from drought-related culling, we are in for a much bigger impact over the next year.) Fed steer and heifer harvest numbers trended lower from the end of June through late September — 139,638 fewer compared to the same period in 2010 —for a net reduction in the fed-beef carcass weigh-up of 64.1 million lb., or two percent. This combined with a seasonally lower Choice grading trend, exacerbated by extreme heat in the South, to significantly reduce Choice-grade tonnage in August and September.
Congruent with this timeline, one of the largest beef retailers added a premium Choice product line to its meat case, a definitive shift from a previous focus on Select-grade beef. Observers say this retailer alone created a surge in demand for that upper-tier quality, bringing the formerly drowsy Choice/Select spread back to life. With that shift away from the lower grade, the shift was not so much a jump in prices paid for Choice, but rather a noticeable devaluation of Select product (Figure 2).
In mid-October, the Choice/Select spread had widened by $10 to $12 to reach near $15/cwt. above Select (Figure 3). On an 850-lb. carcass, that left a gap of $127.50/head between Choice and Select. In the North, given the prevailing need to beat a 65 percent Choice plant average, about $44.63 of that figure would be payable on value-based grids. In the South, the same cattle could bring home nearly $63.75/head on grids from plants where the weekly Choice share was closer to 53 percent.
As we head into winter, the seasonal expectation for grading increases, noted in the 5-year average to begin in mid-October. Time will tell if supplies of higher-grading cattle will trend higher as we see a harvest of yearlings that may have seen restricted nutrition on droughty pastures, or those that started on feed during extreme heat. Furthermore, the jury is out when it comes to demand for Choice and premium branded beef. If the big retailers have revamped their product offering—after a long history of competing for low-cost beef honors—and if they truly commit to this new course, then cattlemen can expect to see carcass quality premiums that truly move the profit needle.