Premiums and discounts for US fed cattle have evolved over time in response to changing consumer demand for beef, said Katy Doumit, Kansas State University graduate research assistant and Ted Schroeder, KSU agricultural economist, in a release.
Cattle producers have benefitted from grid pricing by receiving elevated prices for higher-quality beef, Doumit and Schroeder said. Consumers have benefitted from having the quality beef they prefer.
BENEFITS TO GO AROUND
Grid pricing refers to valuing a lot of cattle based on carcass merit, including premiums or discounts for traits such as quality grade, yield grade, preferred weight, special branded programs and more, they said. Premiums and discounts are economically important to producers who market cattle with grid pricing systems.
Most cattle sold under such systems use a marketing agreement with packers, including a base price and a schedule of premiums or discounts, the economists said. Grid pricing results in much greater price variation across transactions than negotiated cash market purchases reflecting quality variation.
In a typical week, 80% of fed cattle purchased under cash negotiated price receive a net dressed price within $2 per cwt ($4/cwt range) of the weighted average price, they said. In contrast, 80% of formula priced cattle realize a net dressed price within $10 per cwt ($20 per cwt range) of the weighted average. This greater variation associated with formula net prices is a direct result of premiums and discounts paid for varied cattle quality and other attributes.
DISCOUNTED CARCASSES
Since the early 1990s, the beef cattle sector has consistently finished cattle to heavier weights, the release said. Carcasses under 600 pounds and over 900 often receive discounts.
As cattle have been fed to finish at heavier weights, discounts packers apply to light-weight carcasses have widened relative to heavier carcasses, they said. Five-Area region carcasses in the lightest weight range (400-500 pounds) saw a $10-per-cwt wider discount from 2004 to 2023 with current average discounts around $37.
Alternatively, Five-Area region carcasses in the heaviest weight range (>1,000 pounds) contracted $9 per cwt since 2004 with current discounts averaging $10, the economists said.
Gains in retail products produced from heavier carcasses enable greater profits for packers, which transmit to producers through reduced discounts for heavier carcasses.
With the gradual transition to heavier carcasses, relaxed Yield Grade 4 and 5 discounts have occurred while premiums for YG 1 and 2 cattle have remained steady, they said. YG 1 and 2 carcasses currently average premiums of $5 per cwt and $2 per cwt, respectively.
Discounts for YG 4 and 5 carcasses average $10 per cwt and $15 per cwt respectively, both seeing more than $7 per cwt reduced discounts since 2004, they said.
Producers considering a marketing agreement were urged to study the alternative grids and match one with their business strategies.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $183.72 per cwt to $187.04, compared with last week’s range of $184.00 to $189.69 per cwt. FOB dressed steers, and heifers went for $290.70 per cwt to $293.67, compared with $289.71 to $296.04.
The USDA choice cutout Thursday was up $2.35 per cwt at $304.53 while select was off $4.21 at $274.34. The choice/select spread widened to $30.19 from $23.63 with 139 loads of fabricated product and 53 loads of trimmings and grinds sold into the spot market.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.25 to $1.38 a bushel over the Dec corn contract, which settled at $4.70 a bushel, down $0.05.
The CME Feeder Cattle Index for the seven days ended Tuesday was $237.25 per cwt, up $0.02. This compares with Thursday’s Nov contract settlement of $242.62, up $4.05.