FED CATTLE MARKET CHASING GRADE

In the past couple of weeks, the spread between fed cattle prices in the north has advanced to generate a sizeable advantage over the south. Last week cattle in Nebraska traded in a wide range from $141 to $147/cwt. The bulk of the trade took place at $143 and higher with the weekly average calculated at $145/cwt.

Kansas and Texas markets were consolidated around the $140/cwt. average, with the top-end of reported sales at $141/cwt. The $5/cwt. average price spread from north to south is indicative of a lack of quality grade achievement in the north. Currently, the northern cattle are “green” as far as fat content is concerned, falling short of the marbling and quality grade benchmarks that packers need to fulfill customer demand.

As a rule of thumb, northern feedlots in states such as NE, IA, IL, SD, and MN have been the volume producers of richer marbling cattle. While this trend stands up in the data, it is not to the exclusion of other states nor negating impressive advances made by states more southern.

Looking just days ahead at May, customer demand for CAB traditional and CAB Prime products is heating up along with the weather. A good share of beef items have been booked ahead by end-users expecting their quality specs to be met in large quantities very soon. As such, packers need to compete to procure the fewer pens of “optimally finished cattle” available in feedlots.

A deeper analysis of the grading data shows that the void in quality carcasses lies within Premium Choice and Prime. Looking specifically at the Nebraska trend, the Choice grade in total is exceptionally high at 73.6%, 1.6 percentage points above a year ago. The Prime grade is where the deficit is seen, 13.4% in recent data versus the record-high 16.5% a year ago. It’s important to keep in context that we are suggesting a “void” in Nebraska Prime carcass production for a period with the second-largest share of Prime carcasses in history.

Sharpening focus to the Premium Choice category, the heart of CAB, the void is also evident. Fewer carcasses in the Prime grade have not resulted in a larger share in Premium Choice. USDA data shows the percentage of Choice carcasses certified for Premium Choice branded beef programs is currently lower than in any of the past four years, albeit fractionally so.

These factors are building a reiteration of the spring seasonal supply/demand imbalance in the premium beef category. Although carcass cutout values have started this week in a slight downtrend, the overarching seasonal theme is for a widening Choice/Select price spread, setting the foundation for CAB and Prime carcass premiums.

Southern cattle feeders with high grading cattle typically benefit from lower packing plant grade thresholds for the upper-quality grades and CAB. Currently, the cash spot market has provided plenty of premium opportunities in the north as buyers have had to pay up to secure the cattle fitting customer needs

SPRING DEMAND RALLY?

As noted in the Market Update, carcass cutout prices were slightly softer in the latest weekly averages, with similar downward pressure noted early this week. It’s likely that grocery and retail businesses are weighing the potential consumer beef consumption pattern during this period of inflationary cost increases for goods.

The CAB carcass cutout increased on average $0.58/lb. the last five years from mid-April through mid-May, a 24% increase. Processing disruptions heavily skewed the 2020 data with a 90% jump in carcass price. Therefore, it’s instructive to ignore that year’s data to gauge recent historical price patterns.

While spring 2021 fed cattle slaughter didn’t feature plant shutdowns, slower chain speeds held production below optimum levels during the high beef demand period. The carcass cutout advance from mid-April to mid-May last year increased just 10%. However, the starting April price was already 25% higher before the advance, bringing the annual price increase for that time to 35%. A 10% increase would have been a logical expectation for the time period moving ahead toward the middle of May. But the lower trend over the past 10 days has nullified that for the time being/

Moving into May the question around boxed beef sales is whether or not the small percentage of wholesale trade conducted in the spot market will see a significant price move. Current price points for tenderloins, ribeyes, strip loins and briskets suggest that these items could develop their normal seasonal trajectory higher into the period. These key items hold much of the potential influence for higher prices.