Cow-calf producers have spent decades improving the genetic makeup of their cow herds. Cattle feeders have also spent that time employing a host of new technologies to improve the way they feed cattle to produce a higher-quality animal.
This focus on quality has paid dividends in terms of premiums to producers and producing more high-quality beef, thus giving consumers a more satisfying beef-eating experience. The result is that U.S. grain-fed beef is regarded as the finest beef in the world.
The Catch-22 though is that the premiums for high quality beef over other beef are narrowing to the point where some producers and cattle feeders might wonder if they will disappear. Producing top-quality beef obviously costs more than producing lesser quality beef such as USDA Select. But it would be a shame if producers and cattle feeders didn’t keep trying to produce even more higher-quality beef even if the premiums narrow.
The industry is currently producing a record tonnage of Choice and branded beef. These two categories accounted for 44 percent of the loads in USDA’s comprehensive boxed beef report the week before last and just over half the week before that. The industry is also producing a larger percentage of cattle that grade Prime. More than 78 percent of all cattle graded Prime and Choice in each of the last five reported weeks, with the percentage more than 80 percent the week before last.
All this has had several effects on wholesale beef pricing. The Choice-Select price spread has narrowed dramatically since late June-early July. So has the price spread between branded and Choice beef. Branded beef has lost some of its premium to Choice. Conversely, the price spread between Prime and Choice beef has widened to record levels. That’s partly because a large amount of Prime beef was sold forward this spring to warehouse giant Costco.
The record Choice beef tonnage has occurred despite beef production not being at record levels. That’s because far more fed cattle are grading Choice than a decade ago and carcass weights are much heavier. Cattle in 2016 graded an average 70.1 percent Choice, compared to 51.7 percent Choice in 2006. Beef production that year was 26.257 billion pounds and this year is expected to be 26.5 billion pounds. The all-time record is 27.193 billion pounds produced in 2002 and production in 2018 might come close to that.
The industry is also selling a record amount of branded beef. The week before last saw 1,268 loads of branded beef reported, 16.2 percent of the load total. The second week of July saw 1,417 loads reported, a weekly record since USDA started reported branded beef volumes in 2008. The large amount though meant the premium between branded and Choice beef narrowed two weeks ago to $2.73 per cwt., although it widened to $6.76 the week before last.
Costco first started selling Prime beef in its stores a decade ago and remains by far the largest seller of Prime beef anywhere. It’s no surprise then that packers forward-sold a large amount of Prime to Costco in late March. Packers felt they should be getting larger premiums for Prime. They sold ahead so they could later short the Prime market, say analysts. The percentage of Prime beef then declined as well.
The result has been dramatic. The May-June spread between Prime and Choice beef was $20-30 per cwt. It has now widened to more than $60 per cwt. It was at a record $63.52 the week before last ($256.30 versus $192.78).
The price of Prime beef’s most popular item, the boneless ribeye, reflects this accelerated value. Its average price in March and April was $9.60 per pound and $10.4 per pound, respectively. These prices were $2.40-2.50 per pound higher than for a Choice boneless ribeye. Prime ribeye prices averaged $10.75 per pound in May but Choice prices increased far more so Prime’s premium narrowed to $1.65 per pound.
The Prime price increased to $11.60 per pound in June for a $2.20 per pound premium, and to $12.15 per pound in July for a $5.12 per pound premium. Analysts forecast August’s price to average $12.40 per pound for a $5.60 per pound premium over Choice. The last time Prime beef had such a premium over Choice beef was in March 2012 when Prime was less than 4 percent of all graded beef.
The current tight supply of Prime comes as traffic at white tablecloth restaurants (most of whom use Prime beef) remains a bright spot amid otherwise weak overall restaurant traffic. Their performance has been a factor in producing the record-wide Prime-Choice price spread. Prime prices might ease somewhat in the next 60-90 days as packers put more Prime on to the spot market and more Prime is produced, say analysts. The highest percentage of Prime typically comes in November (a record 6.92 percent in late November last year). — STEVE KAY
