US cattle prices moved higher this week even as concerns linger about ability of beef prices to sustain significantly higher price points in Q1 of 2013. The gains in cattle prices in part reflect higher cutout values but also continued appreciation in the value of drop credits and generally higher prices paid in export markets. Those gains do not show up if one looks at just the cutout but make up a considerable portion of the profits for packers today. But the cutout has gained ground as well. The overall choice cutout closed on Wednesday afternoon at $195.78/cwt, up $7.1/cwt compared to year ago levels. The select cutout closed at $175.30/cwt, $3.8/cwt or 2.2% higher than the same period a year ago. Looking at the gains in the value of the cutout, it is clear that so far the increase in prices is almost entirely due to higher prices for middle meats. The value of the choice loin primal, which is a composite value based on the value of the cuts and trim from this primal, closed on Wednesday at $266.66/cwt, up some $22/cwt or 9% from a year ago. The increase in the value of the choice loin primal accounted for over 60% of the increase in the value of the cutout even as this primal accounts for around 21% of the volume. The rib primal also was higher, increasing about $13.5/cwt or 4% from a year ago and accounting for another 20% of the increase in the cutout value.
click image to zoom So why do we care so much as to what primal is contributing to the gains in the value of the cutout at a given point? Seasonality is an important component in beef pricing. Going into the holidays, demand for steak items tends to improve and this helps carry overall carcass values. But once the holidays are behind us, we will need to see a notable improvement in the value of other primals. In the past three years, prices for the rib primal in Q1 on average decline about 8% compared to Q4 prices. The rib primal in Q1 of 2012 was actually 13% lower than in Q4 of 2011. Other primals, tend to increase in value from the previous quarter. Last year, those quarterly gains were relatively muted, which has some concerned about another repeat this year as well. Indeed, the chuck and round primals, which tend to carry the carcass in Q1, performed rather poorly last year. Consider that in the last three years, the chuck primal by Q1 was on average 11% than the preceding quarter. However, last year, the q/q increase was just 2%. In the case of the round primal, the q/q average increase was about 7% for the last three years but last year prices rose just 1%. If we have a similar performance this year, needless to say it will be quite difficult to hit the cattle prices futures are currently indicating. The point of this exercise is that in order for cattle prices to climb to record highs, we will need to see a more normal seasonal price appreciation for items other than ribs and loins. Futures are currently pricing cattle for Q1 of 2013 at all time record highs, with Feb live cattle closing at $131.8/cwt and April closing at $135.8/cwt. This would likely require the choice cutout to be somewhere around $206-$209 level. Lower beef supplies should be supportive of higher prices but that presupposes a steady demand curve. Factors such as disposable income growth, unemployment levels and job growth, energy prices and the overall economic environment also will play a role. For now, the steaks and rib roasts are carrying the day as consumers prepare for the holidays. A more balanced market is needed for expected record prices to become reality.