As we see the industry average share of Choice in the fed cattle mix upwards of 70% and Prime over 5%, it’s not uncommon that I’m engaged in conversations with cattle feeders achieving Certified Angus Beef brand acceptance rates greater than 40% on some of their better pens. In these days of cheap costs of gain relative to the selling price of cattle, we often also see more Yield Grade (YG) 4s than any of us would aim for, sometimes from 20% to 30% or even higher. While this is a management issue that can be changed with more optimal marketing, there appears little incentive, based on the fact that we’ve encountered this more often in the past three years, as carcass weights advanced to all-time highs on lack of fed cattle supplies.
Grid marketing has become challenging at times as feeders strive to hit quality grade and CAB premiums while hoping those outweigh the YG 4 discounts when cattle have been fed past their optimal fat endpoint. Feeders have long held that a narrow Choice/Select price spread creates small Choice premiums for high-quality cattle and a potential for YG 4 discounts to become insurmountable.
This is all true enough, but the magnitude of the disadvantage has been overstated in many cases, as feeders often forget to include the CAB carcass premiums (added on top of the Choice premium) when figuring this math. The accompanying table compares differing pen level YG 4 outcomes against quality grade premiums and discounts to arrive at a breakeven price for the Choice/Select spread when the YG 4 discount is $9.80/cwt. for each offending carcass. The USDA 2016 industry average was around 11% YG 4, but I’ve used 14% as a moderate number for Angus influenced cattle marketed “on time,” while larger YG 4 balances of 20% and 30% take us further into discount territory. The numbers show the reality: high-quality cattle achieving 90% Choice and 30% CAB acceptance can start to pay premiums on a grid even when the Choice-Select spread is as narrow as $3.30/cwt. and the YG 4 incidence goes as high as 20% of the pen.
April has seen surprising strength in fed cattle prices compared to what many expected. The common belief was, once we switched from harvesting the finished yearlings in March to the calf-feds in April, supplies of harvest-ready cattle would surely grow. As well, packers were said to have so many cattle contracted for April that they’d need fewer in the weekly spot market. So what happened? April fed steer and heifer head counts have been ample in comparison to a year ago, but carcass weights were much lighter. Moreover, the “sold ahead” packer position on boxed beef commitments has kept the market much stronger than anticipated.
The $132/cwt. fed cattle average listed for last week is the strongest price we’ve seen this spring, surpassing the last week of March, then projected as the spring high. Steer carcass weights are now 28 lb. lighter than a year ago, heifer carcasses 26 lb. lighter. With fed steers and heifers at roughly 80% of the federally inspected harvest, we can calculate that those lighter weights represent a decline of some 15,500 head of cattle in last week’s harvest count on a carcass weight basis.
The April 1 Cattle on Feed Report last Friday showed the inventory “on feed” (larger than 1,000-head capacity) at 100% of a year ago. Cattle placed on feed during March were 111% of a year ago while March marketings of finished cattle were 110% of a year ago. While placements have been very strong since November, the marketing rate has also been quite aggressive. The larger March placements, however, will likely have some negative impact on Live Cattle futures prices for late summer and fall months.
Boxed beef prices were destined higher last week as packers were up against a two-week spike of $6-7/cwt. on live-cattle cost. The weekly Urner Barry Choice cutout average jumped almost $6/cwt. to $209.80 while the Friday USDA Choice cutout was posted at $217.16/cwt. The weekly Urner Barry CAB value at $218.70 was up $3, narrowing the spread of CAB/Choice spread to $8.90/cwt. in the spot market. While boxed beef prices have increased since March, the comprehensive cutout price of $207.21/cwt. is 4% lower than a year ago last week and the current CAB cutout price is 2% lower than a year ago. In subprimals, CAB ribs caught the biggest increase last week to $8.07/lb., up 18 cents and just 3 cents under a year ago. CAB briskets were up pennies but still cheap at $2.25/lb., and top butts fell 30 cents to $3.56/lb., down $1 (22%) from a year ago. Chuck and round prices are steady to firm for now.
Double-take on Lighter Carcasses
We touched on lighter carcass weights in the last edition as an indicator factor linked to declining quality grades, but the topic bears another look as we have seen a 16-lb. decline in steer carcass weights in the two-week interval. This marks a decline for the same week a year ago of 28 lb. on steers and 26 lb. for heifer carcasses for the week ending April 8th.
While feed cost per lb. of gain prices remain at just over half the price of live cattle, the hugely positive basis, which has adjusted some lately, has sent a clear message to feeders to sell cattle ahead of their targeted marketing dates. This phenomenon is entirely unlike the market behavior for much of the past few of the leanest-supply years, and has turned the tables on the carcass weight pattern that took us to record first-quarter highs just a year ago.
Keeping it all in perspective, the current steer carcass weight is just 2 lb. heavier than the same time period in 2014, which would have also been an all-time heaviest mark on that calendar date at that time. Lighter weights are a good thing for the industry in several ways as we all know what a current fed cattle market will do for prices—and that’s most certainly what we saw again last week. Last week’s fed cattle price crossed above last year’s price for that week. The question today is whether the demand is built on yesterday’s prices or will we see a continued push through grilling season at these slightly higher boxed-beef values?