This year’s consumer rush to buy high-quality beef may be pausing, implying the beef and cattle markets may be topping, an analyst said.
Alternatively, it could mean that seasonal demand for high-quality choice beef hasn’t kicked in yet or that pre-emptive seasonal buying by retail grocers and others ahead of the holiday is over, the analyst said. It’s a little too early to tell.
CHOICE/SELECT SPREAD NARROWING
Demand for choice beef over select beef is seen by graphing the weekly average price difference between USDA choice and USDA select beef and comparing from year to year.
The choice/select spread is calculated by subtracting the USDA cutout value, on a per-cwt basis, of select-graded beef from the USDA cutout value of choice beef. When it is wide, it means choice beef prices are high relative to select beef and vice versa.
The difference between the wholesale prices of choice and select beef, called the choice/select spread, is narrowing at an unseasonably early point in the year.
Taking the average of weekly spread averages from 2014 through 2018, there are two distinct peaks in the choice/select spread. One occurs around the first week of June, and the second happens around the first week of December.
SPREAD OUT OF SYNCH
Last year was very out of character as consumers discovered that choice really matters. The economy was good with low unemployment, and people were willing to pay for quality. There was only one peak last year, and it came the second week of October, totally bypassing a normal summer slump in the spread.
This year, there was a peak the first week of June, which corresponds to the timeframe of a normal early summer peak. The spread then fell off to a bottom the first week of July – roughly normal timing.
But then the spread began to rise to the unusual August peak before falling off again to last week’s level, which was just above the 2014-2018 average.
WHAT NOW?
The question now becomes: What now? Does the spread get new energy as it crosses the five-year average? Does it level out for the rest of the year? Does it slowly fade into the sunset?
No one can tell what will happen down the road, but without strong demand for choice beef this year, it’s probably safe to say that fed cattle prices may struggle.
About 73% of US beef production currently is graded choice, according to USDA Agricultural Marketing Service data. This is up from last year’s 69% and has come about because of producer reaction to strong demand for choice and the Great Lockdown, which backed up slaughter-ready cattle at the feedlot level and giving them more time to pack on more fat.
Carcass weights remain well above a year ago, even though they are coming down as the industry catches up with the lockdown shock. Heavier weights almost always mean more choice product, so if consumers don’t step up….
CATTLE, BEEF RECAP
Fed cattle trading this week was seen at $107 per cwt on a live basis, up $2 to $3 from last week. Dressed-basis trading was reported at $167 to $168 per cwt, up $3 to $4.
The USDA choice cutout Thursday was up $1.24 per cwt at $218.98, while select was up $0.08 at $207.62. The choice/select spread widened to $11.36 from $10.20 with 120 loads of fabricated product and 27 loads of trimmings and grinds sold into the spot market.
The CME Feeder Cattle Index for the seven days ended Wednesday was $142.38 per cwt, down $0.20. This compares with Thursday’s Oct contract settlement of $140.92 per cwt, down $0.42.