In the context of trading finished cattle to the packing house, a negative grid refers to a pricing mechanism used by packers to determine the value of the cattle based on certain predetermined criteria, said Narciso Perez, director of cattle operations for Zia Agricultural Consultants, in an email.
It involves applying discounts to a negotiated base price of cattle when specific quality or carcass attributes do not meet contractual specifications, Perez said, essentially penalizing producers for deviations from the preferred weight and quality traits or carcass characteristics.
NOT NECESSARILY NEGATIVE
But a grid doesn’t have to be negative. A grid’s base price serves as a starting point for final pricing, he said. The actual price paid to the producer is adjusted up or down based on the specific attributes of the cattle.
Discounts typically reflect factors such as weight, yield, quality grade, marbling score, muscle thickness, fat thickness and other measurements that affect the marketability and value of the carcass, he said.
For example, if the grid specifies a premium for higher-quality grades such as prime or choice, cattle that fall into lower grades, such as select or standard, may incur a negative grid discount, Perez said. Similarly, if the grid sets specific weight ranges or targets, cattle that exceed or fall below those targets may also face discounts.
The system is designed to encourage producers to deliver cattle that meet the desired specifications outlined in the grid to maximize the packer’s profitability, he said. It encourages the production of consistent, high-quality beef products that meet consumer demands and market preferences.
By applying discounts for deviations from these specifications, packers can align the value paid to producers with the end product’s marketability and customer preferences, Perez said.
THEY CAN CHANGE
It’s important to note that negative grids can vary among packers and can be subject to change based on market conditions, consumer preferences and other factors, he said. Producers should monitor closely the specifications and discounts outlined in the grid to make informed decisions regarding cattle selection, feeding programs and marketing strategies.
The adaptability and fluctuating nature of certain factors in the cattle industry caused frustration among cattle feeders when they adopted new practices initially, Perez said. Feeders expressed their dissatisfaction, claiming that once they started producing the type of cattle that qualified for premiums, the packers would alter the specifications of the grading system.
While some of those issues have been resolved over time, it remains crucial for cattle feeders to remain attentive and aware of any changes that may affect their operations, he said. Staying informed and adaptable is essential for success in the industry.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $181.07 per cwt to $184.71, compared with last week’s range of $182.00 to $191.00 per cwt. FOB dressed steers, and heifers went for $286.79 per cwt to $289.29, compared with $286.23 to $295.18.
The USDA choice cutout Tuesday was down $3.81 per cwt at $329.23 while select was off $1.24 at $298.43. The choice/select spread narrowed to $30.80 from $33.37 with 116 loads of fabricated product and 31 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 $1.30 to $1.50 a bushel over the Jul corn contract, which settled at $6.23 a bushel, down $0.14 1/4.
No deliveries were tendered against Jun live cattle Tuesday.
The CME Feeder Cattle Index for the seven days ended Monday was $224.97 per cwt, up $3.52. This compares with Tuesday’s Aug contract settlement of $238.50 per cwt, up $4.82, and Sep’s $241.97, up $4.47.