This discussion factors back to grid pricing for fed cattle and expected quality price spreads. CattleFax recently points out that the Prime cutout premium over Choice, roughly $35/cwt., is nearly half what it was a year ago. This is a sign of buyer price sensitivity and pushback for the highest priced, highest quality beef (disregarding niche products). However, the weighted average grid premium across packers for Prime carcasses this week is $18.49/cwt., just 25% lower than a year ago.
This narrowing premium gap is typical of a market where short supplies result in higher prices across all quality offerings. The CAB traditional (Premium Choice) cutout premium above Choice is currently record-wide, pulling back from $21.93/cwt. to $18.00/cwt. in the past two weeks. One might estimate that this premium spread could also be subject to further compression in the near term given what we’ve observed with the Prime premium.
The Choice/Select spread remains historically robust at $26.07/cwt. in today’s USDA report. While lack of demand for Select carcasses is an archaic price measure for carcass values, the Choice/Select spread remains the foundational and most seasonally variable quality grade component on most packer grids. Thus, the feedyard’s realized price for every carcass at, or above, Low Choice quality grade is highly dependent on the Choice/Select spread. With the feedyard’s share of the Choice/Select spread typically ranging near 30% of the total, a spread value larger than $20/cwt., for instance, is a key driver to motivate high quality carcass production. Current market values are
providing confidence in this direction.
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