As of Tuesday this week, the Choice spot market cutout had surged to $212/cwt. according to the daily Urner Barry report ($220/cwt. on USDA), 15% up from the January low. Analysts this week have kicked around the idea that perhaps the beef market has found a top and that end users may start to back away at these levels. That idea is bolstered by the fact that packers sold a large volume of product far out front during February. Subprimal pricing was too attractive at the historical seasonal low, begging buyers to take advantage. All of this leads to a certain level of confusion as to market direction. It may be helpful to keep a perspective of the past three years (chart), when beef prices were much higher than today. As well, the pork cutout currently rests at 92% of the prior 3-year average and Midwest chicken breasts are at 107% of the prior 3-year average. This compares to the Choice beef cutout at 88% and CAB cutout at 87% of their respective prior 3-year averages. That might be a bit of a simplified review, but beef remains competitively priced with other proteins today.
The fed cattle market was impressive again last week as prices were steady to higher with an average of $125/cwt. but instances up to $130/cwt. in the north. Analyst estimates pegged packer profitability from $70 to $100/head. That should motivate packers to keep increasing weekly harvest levels to the degree supplies will allow, as market-ready cattle are the limiting factor at this point. Last week’s 587,000 head, the second consecutive weekly increase in the range of 6-7,000 head, has met skepticism that steer and heifer supplies will allow anything larger this week. Cattle feeders are eager sellers at this point due to the tremendously positive basis: the current cash price is roughly $7/cwt. higher than the April Live Cattle contract. Feeders have also been selling cattle for delivery 3 or more weeks into the future to lock in the current profitable price. Risk for lower prices in the weeks to come is the scenario that they are trying to circumvent.
February quality grade trends were impressive with the U.S. Choice percentage at 73% vs. 71% a year ago, while the Prime share came in at 6.3% vs. 5.7% a year ago. Latest steer carcass weights (878 lb.) are 9 lb. lighter than a year ago while heifer weights (822 lb.) are 12 lb. below last year at this time.
On the end-product side, cutout values continually escalate, though not keeping pace with higher fed cattle prices. As noted, packers are still very profitable at today’s cost/return mix, so all is well for both cattle feeders and packers now, a rare occurrence. Last week’s average Choice price was up $5/cwt. while CAB product was up just $3.60/cwt., narrowing the CAB/CH spread to $6.90/cwt., a much better sales opportunity compared to a year ago. The Select cutout price was up $4.70/cwt., narrowing the CH/SE spread to $6.90/cwt. Urner Barry’s CAB report shows loins as the clear leader last week, up $12.49/cwt. for the primal (+4.5%). Strips, top butts and tenderloins were all very strong; tri-tip was the only loin item showing no increase, essentially flat since the first of the year. Ribs were modestly higher while chuck and round items did not see much price difference from the week prior. Skirts are a hot item, the inside skirts at $5.20/lb. for the second week being their highest since the summer of 2015 ($6.30/cwt. historical high). Briskets are in a slightly higher range, catching the same early spring increase as a year ago. Grinds, recently higher, fell back a bit last week.
Carcass weight role in marbling level
As fed cattle carcass weights have escalated steadily over decades, beef industry participants have included this factor as one of the drivers in marbling improvement. In the past 10 years, the relationship between carcass weight and marbling appears to be fairly strong, as seen in the bar/line graph, with the weight and marbling level increases seemingly hand in hand. There were minor departures in 2010 and last year when carcass weights declined while marbling continued to increase, but the trend stands. Meta-analysis of several pieces of research (Owens and Gardner 2000) indicates that both heavier carcass weights and additional days on feed are positively correlated with marbling.
However, a look at more than 800K carcass records in 2016 (CAB Consist study of A-Stamped, CAB-eligible carcasses) casts a different light on the subject. The scatter plot displays each carcass by its hot weight (X axis) and marbling score (Y axis). The multitude of data points are nearly a shotgun pattern, which lends to the idea that marbling is certainly not dependent on carcass weight alone. In some instances, higher marbling levels were achieved at lighter carcass weights while lower marbling degrees were also noted at the heavier end of the weight spectrum. Even so, the red trend line does uphold the theory that heavier carcass weights are generally associated with higher marbling scores, indicated by the upward and right direction of the line.
The tremendous variation in marbling degree achieved at each hot carcass weight points to other factors, genetic or environmental, that impact marbling and subsequent quality grade assignment. So far in 2017, steer carcass weights are 8 lb. lighter for the same period last year while the combined Choice and Prime share of the fed cattle supply is higher by 3 percentage points. Carcass weight is only a piece of the marbling formula.