30 June 2012

4 minute read

Indeed, some producers carve out a reputation, a kind of brand for their consistently high-quality cattle akin to that of Mercedes-Benz, Apple or Rolex.

Pete Anderson, Ag Knowledge Services, says owners of those better cattle should earn premiums, but producing them is just the first step on the way to capturing value.

“Grid marketing of fed cattle is one way to get paid a premium for producing something that is superior to the average,” he notes in a new white paper.

“Understanding grid marketing: How quality grades and grid conditions affect carcase value” is available with its several tables at http://www.cabpartners.com/news/research.php.

The subject may seem “a little mysterious and risky to some, especially feeder cattle producers, who are new to retained ownership or only market cattle once or twice a year,” Anderson says. It helps to know how grids work and how your finished cattle will perform.

The Choice-Select spread is a key to many premiums and discounts, published daily by USDA and based on sales of primal cuts. On 15 February 2012, for example, the $5.11 per hundredweight (/cwt.) spread came from the range of a $19.95/cwt. Choice premium on loins to a Choice discount (-$3.40/cwt.) for the short plate.

In 2011, a particularly volatile year, the spread ranged from near $0 to more than $18/cwt., with exaggerated seasonality. Typical seasonal supply factors are higher grades in the winter, lighter carcases in spring and fewer finished cattle in summer.

On the demand side, the grilling season supports steaks and burgers while the fall and winter holidays focus on roasts from the chuck and round. The economy, exports and decisions of large companies are nonseasonal influences, Anderson adds.

The higher the Choice-Select spread, the more premium for quality cattle.

“But with grid pricing, what looks like simple math is often not so simple,” he says.

Mastering the math means figuring in a few more factors.

“The first of these is the percentage Choice requirement (Choice base) required to get par value,” Anderson explains.

Each grid publishes its Choice base under terms and conditions; sometimes it’s a fixed number but more often it is a moving target like a plant average. Either way, as the hurdle required for par moves higher, all cattle are worth less money above average.

“That’s because premiums are generated not by the absolute number of Choice cattle, but by the amount by which your cattle clear the hurdle set by the grid,” he says (See Box).

Beyond Choice and Select, cattle that grade USDA Prime or qualify for Certified Angus Beef® (CAB®) or other branded programs receive premium prices, and those can be substantial, Anderson says.

For example, if 40 per cent of your cattle make CAB at $4/cwt. more, it amounts to another $12.80 on the pen average, figuring 800-pound carcase weights. Prime premiums can run much higher, but even at $15/cwt., your 800-lb. carcasees grading 20 per cent Prime add $24 to the per-head pen average.

Heavily discounted quality grades can be a problem in some sets cattle. USDA Standard grade beef has almost no marbling, and its likely unsatisfactory eating experience brings the discount. The table (below) shows an example of how low- or high-grading cattle could compare in premiums and discounts, and the impact on cattle value. In this case, cattle grading 50 per cent Choice would bring the average market price, Anderson notes.

“Remember, it is not enough to create cattle with high value,” he says.

“You need to find a way to capture that value and put it in your pocket.”

If a grid’s Choice requirement is the previous week’s plant average, it could vary by 10 to 20 percentage points during a year.

Suppose in the current week the base is 50 per cent and you sell a set of cattle that grade exactly that.

In that case you will meet the threshold and get the average price, in this example $180/cwt.

At a different time of year, with a plant average of 60 per cent and a Choice-Select spread of $12/cwt, those same cattle would fall below the threshold and receive only $178.80. All cattle are worth more with a low Choice requirement; a wide Choice-Select spread magnifies differences that are lessened by a narrow spread.

June 2012