Ranching is a lifestyle, but it’s also a business. And for a business to be successful, it must show a profit. Given that most financial aspects of cow-calf and stocker budgets are generated from a “price-taker” position, adding value to feeder cattle is a perennially popular topic among cattlemen.
With input decisions individualized and the price of those inputs often set by retailers or commodity markets, earning maximum value for feeder cattle is a worthwhile pursuit for cattle producers. There is a wide disparity in the intrinsic value of cattle that is realized both in the feedlot setting and on the rail. As the cost of gain in the feedlot has advanced by 50% or more in the past 10 years, the value of efficient gain has driven an even wider gap in feed conversion value in recent years. Examples have shown that within a pen of single-source cattle, $400 or more value-per-head differences can exist.
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Improved carcass quality, consumer demand
Since the early 2000s, the U.S. cow-calf sector has successfully implemented genetic and management changes to improve carcass quality. The proof is in the data, as the USDA Choice quality grade rose from 52% to 72% (of all carcasses) over the last 15 years. Similarly, the number of carcasses grading USDA Prime expanded from 2% to 10%, and the Certified Angus Beef (CAB) carcass certification rate grew from 14% to occasionally more than 40% of eligible carcasses.
One could guess that future advances in marbling and associated quality grades may not be rewarded. To the contrary, latest price trends show strong demand for highly marbled, premium beef. In fact, there were record-wide price spreads with quality premiums for Choice, CAB and Prime carcasses in 2022.
Although volume and proportion of the most premium grades has grown, the end-product customer base has adapted to the larger offering of higher quality beef. In the past decade, for example, carcasses meeting specifications for the CAB brand increased from 3.4 million to 5.9 million in 2021, a 74% increase.
Just as supplies aggressively increased, the CAB carcass cutout premium above USDA Choice expanded by 93% to average $17.76/cwt in 2021. Smaller total fed cattle supplies in 2022 pulled the CAB carcass count down slightly to 5.7 million. Weekly CAB cutout premiums were essentially unchanged, averaging $17.09/cwt in 2022, but spiking in December to $29/cwt as holiday supply and demand pressures peaked.
The Prime quality grade (including CAB Prime) has shown supply-related price sensitivity in the past few years. Prime carcass production dropped more than 10% in 2022, as feedyards became more current on fed cattle slaughter schedules compared to the backlog effects in the prior two years. Record Prime carcass premiums resulted from the pullback as grocery stores, in particular, adjusted to greater availability of Prime beef. This has stemmed from a multi-year run which saw fed cattle in 2013 achieving just 3% Prime to the peak in 2020-21, when more than 10% of steer and heifer carcasses met the Prime marbling mark.
The pluses and minuses of carcass value
In recent years, carcass cutout value changes, driven by quality grade and branded beef programs like the Certified Angus Beef brand, have propagated a widening value spread for finished cattle. Quality and yield grade premiums and discounts have been applied to fed cattle carcasses for several decades. Yet the magnitude of those premiums and discounts has evolved while cattle feeders have increased the proportion of their sales formats toward formula pricing.
Launched in January, the Cattle Contract Library reveals that 94% of fed cattle contracts in spring 2023 included premium and discount adjustments to the base price. Of those with adjustments, more than 85% included a quality premium and discount while more than 50% include a yield grade component.
As logic would suggest, premium and discount prices—reported by packers buying cattle on contracts—would reflect the wholesale carcass cutout price spreads. Packers don’t entirely pass back their carcass value margins to feedyards, but the magnitude of these margins is proportional to profit from wholesale boxed beef sales returned to feedyards.
Seasonality in supply and demand factors creates variation in weekly carcass values primarily as they relate to quality grade rather than yield grade. According to USDA, both the Prime-Choice and Choice-Select price spreads on packer grids topped well over $30/cwt in 2022. Throughout the second half of 2022, this resulted in many occasions where $200-350 premiums (above the base price) were paid on individual carcasses. CAB premiums tend to vary less than Choice and Prime premiums. The CAB premium typically ranges from $3-5/cwt above the Choice price, resulting in an average $42 per-head premium last year for Premium Choice CAB steer carcasses.
Regarding the yield grade side of the grid marketing discussion, packers have adapted premiums to reflect a more quality-focused pursuit of fed cattle. Discounts for Yield Grade 4 and 5 carcasses discourage overfeeding in the feedyard sector. Yet packers have softened these discounts to encourage feedyards to feed cattle to their optimum marbling capabilities.
In 2006, the average reported Yield Grade 4 discount was $15.53/cwt, while the Yield Grade 5 discount was $22.41/cwt. As marbling became more of a customer-demand focus, packers reduced their average Yield Grade 4 discount to $9.81/cwt and the Yield Grade 5 discount dropped to $17/cwt as early as 2012. This evolution was a direct result of packers changing the incentives for feedyards to pursue a higher marbling standard, thus meeting demand for premium beef products in Premium Choice (CAB) and Prime.
The leanest carcasses, earning a Yield Grade 1, have enjoyed a premium increase in the same timeframe as yield grades 4 and 5. However, at less than 10% of industry production volume, the average $5/cwt premium does not add a lot of incentive when compared to the richer quality grade premiums available.
Adding value to your calf crop
With the beef quality revolution, the right production decisions can result in added value to calves and financial reward to farmers and ranchers. If you are interested in creating feeder cattle that could earn a premium, consider genetic merit.
To align with carcass attributes, breed selection is an important consideration. Carcass quality is supported by EPDs and other indexes. To aid in the bull buying process, Angus bull buyers can look for the Targeting the Brand logo. The logo signifies that a bull has a minimum EPD for marbling of +0.65 and an Angus Grid Value Index ($G) of +55 or higher.
When retaining replacement females, producers must consider a balanced trait selection for maternal and terminal traits. Multi-year university cow herd data and practical ranching examples have demonstrated that maternal traits and marbling, to name a specific terminal trait of importance, are not antagonistic.
Backed by data presented, the modern fed cattle market is focused on carcass quality. The challenge for cow-calf producers is to get paid a premium for the genetics and production decisions required to match market demands.
Programs such as AngusLink provide cattlemen an opportunity to create a Genetic Merit Scorecard, which benchmarks the genetic merit of a calf crop against a large database. When marketing your cattle, it is advantageous to build a reputation for your operation’s genetics and inform buyers about the quality of your feeder cattle product. Retaining ownership on your own calves or partnering with a quality-focused feedyard are two ways to ensure receipt of any premiums your cattle may earn.
Much of the cattle business occurs outside the control of farmers and ranchers. Capitalizing on areas of control, like adding value to your calf crop, means keeping your operation in the black and premium beef on the consumer’s plate.
