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CME: Beef Cutout Values Increasing in Recent Weeks

10 March 2016

US - Wholesale red meat prices are summarised into a carcass equivalent value for the major species by USDA’s Agricultural Marketing Service, Market News Division (AMS).

A carcass equivalent is not a “price”, but it is a “value” derived from individual meat cut prices and put on a carcass equivalent basis.

So, it is a rather broad measure and has many assumptions, which are periodically adapted by AMS using industry input. Here we will focus on recent trends in beef cutout values.

For beef, daily cutout values (morning and afternoon) are calculated by AMS for the cash or negotiated trade (representing product priced and to be delivered from 0 to 21 days).

The daily reports provide values only for product graded as either Choice or Select by USDA and use negotiated or cash trade reported by packers; excluded are: negotiated priced product for delivery in over 22 days; formula prices product; and product sold using forward contracts. Further, the reported cutout value eliminates distressed sales (product that packers are running out of time to sell as “fresh”).

Weekly (on Monday for the prior week) AMS provides the “comprehensive” beef cutout value report. That report incorporates all sales methods, not just negotiated.

In February of this year, 55 per cent of wholesale sales were formula; 31 per cent were negotiated for delivery within 21 days; 11 per cent were negotiated for delivery in more than 22 days; and 2 per cent were forward contract sales.

In terms of quality breakdowns, the weekly comprehensive report lists: Prime, Branded, Choice, Select, and Ungraded categories.

Each of the five quality breakdowns are different, the highest USDA quality grade is Prime and the lowest tends to be Ungraded.

The weekly comprehensive cutout value is the most representative of all wholesale beef transactions and the weekly report provides important detail.

The overall comprehensive cutout value, which combines all AMS breakdowns into one wholesale beef value, for February 2016 was 32 per cent below a year ago.

In the top graphic, monthly cutout values are shown by the AMS quality breakdown. Monthly average cutout values bottomed in December, then rebounded in January, and slipped in February. The graphic also shows the large decline in the premium for Prime beef since last summer.

In our assessment, both seasonal demand and supply factors have pressured that premium.

There are seven primal components of the cutout (see bottom graphic for the list. From the primal breakouts it is apparent that only the middle meats (rib and loin) have significant market premiums for high quality grades (Prime and Choice) of beef.

The rib and loin together only represent about 25 per cent of the total carcass. In turn, those two primals drive the premium for Choice graded cattle versus Select.

In recent weeks, beef cutout values and those cuts from the rib and loin have been increasing. In the latest comprehensive report (week ending March 4th), the rib and loin (middle meats) were below a year ago by about 5 per cent.

In contrast, the chuck and round were 24 per cent and 22 per cent below 2015’s, respectively. As pointed out in other recent DLR newsletters there has been relative strength in the higher value beef cuts. Wholesale beef prices will set the stage for how high fed cattle prices go as the critical spring grilling season approaches.

Daily Livestock Report - Copyright © 2008 CME. All rights reserved.

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