Beef cutout values have risen dramatically, perhaps to a new plateau of prices, but with that comes greater differentiation between grades. We are seeing record-high prices for all grades of beef in late 2011, the most positive excitement in this market in the last eight years. The beef complex underwent a similar upward adjustment back in 2003, and stayed relatively stable through 2010. Then some fundamental changes began to reshape the market. Select, Choice and Prime cutouts for year-to-date 2011 are all showing an increase of 20 percent or more compared to their average prices from 2004 to 2010.
Noteworthy, however, to those watching the higher-quality market is the more recent change in the spreads between quality levels. In the past few months we have not only seen an increase in the difference between the cutout values of USDA Prime and Choice, but more significantly an increase in the Choice to Select spread. This spread has tripled from where it was in the summer, averaging more than $15 per hundredweight for October.
While the grade-out has been slightly lower this fall, USDA reports only minor changes in the amount of product sold as either Choice or Select. In October, the number of Select boxes sold was down 3.6 percent from the previous year. Choice boxes were down 2.1 percent. In other words, the widening of the spread may be more a function of demand than supply.
Much has been written and discussed lately about the changes underway at Walmart and the higher-quality beef products the company is sourcing. Historically, Walmart has been a huge user of Select and low-Select product, so this shift within its procurement strategy has likely softened the demand for Select beef. Just comparing October to September, the Prime cutout value was up 1.9 percent. The Choice cutout was up nearly 1 percent and Select was down nearly 2 percent.
The changes in these cutout levels are certainly significant and bear watching by all producers. Regardless of whether any particular set of cattle sells through a value-based system, these market dynamics have a history of creating wider price differentials based on projected ability to grade.