Choice/Select Beef Spread Narrowing Sharply

The difference between choice and select wholesale beef prices is narrowing as quickly as it widened, accelerating a seasonal decline, as the percentage of choice carcasses to select remains historically high.

Last week, the choice/select spread was reported by USDA’s Agricultural Marketing Service at $18.40 per cwt, down $4.59, or 20.0%, from $22.99 the previous week.  Last week’s spread also was down $5.41, or 22.7%, from the high of $23.99 set two weeks earlier.

The spread appears to be poised to crash through the 2010-2014 average and maybe even challenge last summer’s swing low of $2.72 set the second week of July.

The spread widens or narrows based on simple supply and demand principles.  The reality, however, is much more complicated.

Consumer beef demand has been trending toward choice products, especially middle meats, something that many have credited with the widening spread.  This is a trend that packers have noticed for some time, prompting them to pay more for choice-grading cattle.

The higher payouts for choice cattle have prompted more production of choice-grading cattle.  Such has been the case for more than a year.  The percent of beef graded choice as a percent of beef graded jumped last year, and this year’s production is running almost in lockstep with last year.

The greater choice production is likely to continue even if packers reduce the premium for choice-grading cattle.  It takes too long for cattle to reach maturity for it to change quickly.

As a result, the choice/select spread could continue coming under fire.

 

SUPPLY COULD WIDEN SPREAD AGAIN

 

However, cattle feeders appear to be working down their supplies of fat cattle, and weights are coming down at an unseasonal rate.

Last week’s dressed carcass weights were reported at 810 pounds, steady with the week prior but 10 pounds below those of a year earlier.  They remain well above the previous five-year average of 784.6 pounds at a time of year when average weights are climbing from the seasonal low in late April.

If the supplies of the fat cattle that produce the choice-grading carcasses declines, packers may decide to boost the prices for fat cattle again.

Paying more for choice carcasses won’t necessarily mean they’ll get higher prices for the choice beef, but it could skew production back toward fatter cattle again, increasing supplies of choice beef and reducing supplies of select carcasses.

That could add new support to the choice/select spread, maybe even preventing a challenge of the average and last year’s lows.

 

CASH CATTLE MARKET QUIET

 

Cash cattle markets Monday were quiet with no bids or offers reported from the country.

Cash markets last week were $5 per cwt lower than the previous week at mostly $116 on a live basis and at $184 to $186 on a dressed basis, down $12 to $13.

The USDA’s choice cutout Monday was $3.26 per cwt lower at $210.60, while select was off $0.44 at $197.39.  The choice/select spread narrowed to $13.21 from $16.03 with 103 loads of fabricated product sold into the spot market.

The CME Feeder Cattle Index for the seven days ended Friday was $140.21 per cwt, down $1.06.  This compares with the Aug settlement Monday of $140.17, up $0.72.