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CME: More Beef Carcasses Grading Choice Than 2015

11 March 2016

US - On Wednesday the World Agricultural Supply and Demand Estimates (WASDE) were released by USDA-WAOB, which are updated monthly, write Steve Meyer and Len Steiner.

No significant adjustments were in their estimates.

On the crop side, updates were made to South Carolina acreage because there were significant areas of unharvested crops due to excessive moisture, so a resurvey in that state was conducted.

WASDE’s midpoint forecast for corn price received by farmers in the 2015/16 marketing year nationally was unchanged at $3.60 per bushel.

Current marketing year forecast soybean and meal prices were reduced slightly (meal price in 2015/16 is projected at $270 to $300 per ton, down $5.00).

In livestock and poultry, their forecasts of production were raised slightly because of first quarter 2016 output of chicken and turkey. First quarter beef and pork production were both decreased slightly. Annual cattle and hog price forecasts were unchanged from those made in the prior report.

Changing topics, we turn to a fundamental wholesale beef market value relationship, what is often referred to as the Choice/Select price spread.

Both supply and demand changes can quickly impact the Choice/Select price spread. That price spread is the premium of the Choice beef cutout value compared to the lower Select quality grade, as calculated by USDA-AMS Market News.

In terms of demand shocks or shifters, events like the recession that began in 2008 lowered the demand for Choice beef, especially by white tablecloth restaurants; that lowered the Choice beef wholesale price relative to Select.

In the past, when major retailers have moved to using Choice product from Select, the demand shifts have been apparent.

On the supply side, year-over-year changes in the percentage of cattle graded Choice often move prices quickly and dramatically.

If the percentage graded Choice increases, the proportion of Select or lower beef grades tends to decline. Choice and Select markets are differentiated, but interrelated.

Quality grade premiums in the wholesale beef market are usually a component of premium schedules for grid-priced fed cattle. But cash market and formula bids also tend to reflect underlying wholesale market conditions.

The Choice/Select price gauge provides important signals to the cattle feeder in terms of both production practices and marketing of their cattle.

Those wholesale premiums also are incorporated into grid pricing schedules for slaughter-weight cattle sold that way.

In recent years, the percentage of cattle grading Choice increased year-over-year rather consistently; per data collected and reported by USDA-AMS from packers.

Several factors have likely been behind that trend including: improved genetic profile of the US herd; technological changes in how carcasses are graded and standardization of measurement; and changes in production/feeding practices.

In the weekly grading data collected/reported by USDA-AMS, the first time that over 70 per cent of the carcasses achieved the Choice stamp was February 2015, now that level is rather common.

The weekly data (see top graphic) show that so far this year more carcasses have graded Choice than in 2015. Strong moves both up and down are apparent during the year in the Choice/Select value spread (see bottom graphic) and are driven by seasonal supply and demand factors.

Last week, the premium for Choice noticeably widened (year-over-week increase of over $3.82 per cwt.). That may be a short-term blip or it could be the beginning of an earlier than normal springseason rise.

Since the majority of carcasses now grade Choice, what might be on the horizon? First, wholesale market differentiation could increase between products graded in the lower one-third of the Choice grade versus the upper two thirds Choice.

Next, the US grading system may need some updating so price signals are effectively relayed up and down the marketing chain, helping ensure beef produced remains in-line with ever rising customer expectations.

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