U.S. beef markets undergoing dramatic changes

News
Oct 24, 2011
by WLJ

The change of seasons this fall has heralded a change in U.S. beef markets as well, particularly with the dramatic increase in the Choice/Select spread over the past two months.

Since a summer low of $3.30 per cwt., the Choice/ Select spread swelled to a weekly average of $16.68 per cwt. recently. This spread is the largest since the highs in December of 2006 and 2007.

“The Choice/Select spread typically widens at the end of the year, but the increase has been larger and earlier than usual this fall,” said Derrell Peel, Oklahoma State University Cooperative Extension livestock marketing specialist.

The Choice/Select spread is the net difference in prices from two markets, the Choice and the Select beef markets, and is thus influenced by the supply and demand in either market.

Peel said there are generally four ways for the Choice/Select spread to change.

“For example, an increase in Choice demand, a decrease in Choice supply, a decrease in Select demand or an increase in Select supply could all cause the Choice/Select spread to widen,” he said. “It is not always easy to understand what is driving changes in the Choice/Select spread because of the many factors that may be involved.”

There are several factors behind the $13 per cwt. increase in the Choice/Select spread over the past eight weeks:

! Choice grading percentage in 2011 has remained mostly even with year-ago levels; ! Total beef production is falling, with beef production having been below year-ago levels for eight of the past nine weeks; and ! Cow slaughter is currently a higher percentage of total slaughter compared to last year, indicating that the decrease in fed beef is even more pronounced than the total would imply.

“For the past several years, a growing Choice grading percentage has contributed to a generally narrow Choice/Select spread,” Peel said. “These factors all combine to result in lower total beef supplies and proportionately lower Choice supply compared to Select beef supply. More impacts are expected in the coming months.”

The drought forced many younger, smaller cattle into feedlots, which is likely to temper carcass weights and may continue to limit Choice grading percent. High feed costs and lack of feedlot profitability is a growing incentive to minimize days on feed, which is likely to further limit Choice grading percentage.

Peel said wholesale beef values indicate some strength in middle meat demand in recent weeks.

Prices for tenderloin and ribeye products have risen above year-ago levels in recent weeks, while prices for chuck and round products continue well above last year’s levels.

In all, beef demand appears to be improving, albeit slowly.

Peel believes the forthcoming decreases in total beef production—especially for Choice beef supply— will continue to push wholesale and retail beef prices higher and provide a critical test of demand.

“It is unclear just how high beef prices can rise before demand will be choked off,” he said. “Clearly, the foreign component of demand in terms of beef exports has been critical for the past 24 months.”

While export demand is expected to remain strong into 2012, Peel thinks it unlikely that the U.S. beef market can maintain the 20 percent to 30 percent pace of increase of 2011.

Domestic beef demand is still sluggish, but sharp reductions in supply are expected from late 2011 through 2013.

With a strong ground beef demand as a base, Peel believes tight supplies of Choice middle meats, along with strong exports of some high-end products, may continue to support higher wholesale and retail beef prices in general and at the same time, strong middle meat prices and a relatively wide Choice/Select spread. — WLJ


{rating_box}