Grade Does Matter
As the calendar transitions to winter, seasonal shifts in the cattle and beef industry will begin to appear with reduced slaughter, moderating weights, improvement in grade and slower beef demand following winter holiday buying.
Throughout most of the year, slaughter has outpaced expectations with both fed and non-fed slaughter on pace to finish above last year and total cattle slaughter expected to be the highest since 2010. Weights will likely average at all-time highs for fed cattle for the year. While weights do tend to increase over time, the last few years saw especially large increases with challenges surrounding packing capacity, so with improved harvest capacity and elevated grain prices, continued increases in weights has been somewhat of a surprise.
Elevated slaughter and weights have combined for a record year for beef production. Though slaughter and production have been large, there has been a significant decline in the availability of higher grading cattle.
Year-to-date, Choice and Prime fed cattle grade is almost a full percentage point below last year. The difference is even more substantial for Prime and upper 2/3 Choice cattle, which have made up 31.2 percent of slaughter compared to 33.3 percent last year. Though total fed slaughter is above year-ago, this still makes for almost 400,000 fewer carcasses grading upper 2/3 Choice and above.
Tighter supplies of higher grading beef have created large spreads between Choice and Prime, as well as Choice and Select product, especially before winter holidays, where piece count is more important than pounds for upper grading product. Moving forward, with tighter supplies and drought-forced movement, grade is not expected to perform above the past few years.
In recent weeks, grade has begun to seasonally improve as we move into a supply of cattle that were placed at heavier weights, fed longer, and tend to grade better. Also, once the winter holiday buying is complete, demand for the high grade and piece-count product will slow. Slower demand and an increasing supply of Choice relative to Select product will force the spread to narrow, but the question is how narrow could it get?
The last few years have seen wide spreads as consumers have developed a stronger preference for Upper 2/3 Choice and Prime product. Since June, the Choice-Select spread has been above $20/cwt, and while it has declined some in the last few weeks, it remains historically high. Seasonally, the spread tends to narrow from early to mid-December through the mid-first quarter and typically finds a low at around $5. While seasonally narrowing, the spread will likely struggle to fall below $10 as reduced slaughter numbers and historically strong demand for higher grade will provide additional support to Choose and higher product.
Bottom line: With fed slaughter projected to be down over 150,000 head in the first quarter, there will be less overall beef production. As a result, even with seasonally improving grading percentages, expect less Prime and Choice production and historically firm boxed beef spreads.
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