The reason for the degradation of these quality spreads is three-fold. First, we know that packers are currently buying fewer cattle on grid pricing arrangements. Smaller harvest capacities at packing plants have decreased the size of the weekly negotiated cash trade as well as negotiated grid cattle that packers can buy. As a result, the weighted average numbers are likely skewed toward fewer grids.
Secondly, as it relates to the Prime grade specifically, the much lower demand for rib and tenderloin subprimals has likely impacted the cutout to a large extent. Prime carcasses see the poorest utilization. Far fewer total pounds from Prime carcasses are sold specifically to fulfill Prime grade orders. The Prime premium degrades quickly as price quotes move away from middle meats even though this has improved in recent years.
Finally, carcass marbling measurements at the current time are fractionally higher than a year ago. This means we’re seeing record percentages of Choice and Prime grade carcasses this spring even though the tonnage total in all grades is significantly smaller.
The Choice/Select price spread is behaving at or above the level that we’d expect in April with a $12.22/cwt. premium in last week’s report. This means that all Choice and higher grade carcasses priced on a grid at this time will still see a decent cumulative premium.
The above factors are enough to illustrate some dynamics that are currently affecting the premium structure of value based carcass sales now and in the immediate near term. These short-term fluctuations are to be expected, especially when considering the enormity of changes that have impacted the beef supply chain.
The many challenges the beef market is facing today are serious short-term problems but are not indicative of long-term trends. Price and demand signals will also realign as the pandemic subsides.