Kay's Korner

Jul 6, 2012

Steaks fuel cutout strength

We may be a ground beef nation but steaks still put the sizzle in wholesale beef prices and underpin fed cattle prices. That’s what occurred this spring, as beef cutout values responded to aggressive retail featuring of steak items for the Memorial Day weekend and throughout June. Meanwhile, packers continue to sell more beef on a formula price basis, and this showed up in middle meat pricing this spring.

One of the most surprising aspects of the beef market this year has been the strength of the cutout values. Several factors have driven the values to nearrecord high levels and kept them there longer than expected. Domestic beef production is down 2.7 percent this year on last. Imports are up sharply but they are mostly of lean manufacturing beef. Second, demand has at least remained steady with last year.

The third factor is that demand for high-quality middle meat items has improved significantly from a year ago. Their values compared to end meats had languished since the height of the recession in 2009. But their premium over end cuts has been largely restored. In addition, there has been stronger demand for Choice beef, in part due to Walmart’s purchasing after it launched its line of Choice cuts late last year.

Much of the strength in Choice middle meat values has come through the loins. They have also caused the price spread between the Choice and Select cutouts to advance to their widest level in six years. Their recent advance comes because of strong sales over the Memorial Day weekend and in June, as retailers continued to strongly feature items like T-bone steaks. Another way to see the strength in loin prices is in the ratio between the Choice loin primal and the overall Choice cutout. Loin values were 121 percent of the cutout’s value at the start of 2011. The ratio increased to 126 percent the first week of January this year. It increased to 151 percent in early June, versus 135 percent a year ago.

Packers were able to push loin prices sharply higher because of demand and the way they are pricing beef. They are selling a lot of meat on the spot market but even more on formula pricing, which is based on the spot market. Formula-priced beef exceeded spot market sales for the first time in May 2008 and has remained the largest category most months since then.

The move to more formula sales is because of buyers’ desire to ensure adequate supplies of beef as cattle numbers and production shrink, and be cause of price volatility and buyers’ aversion to risk. Formula sales are largely based on USDA’s week prior weighted average spot market prices.

This means buyers and sellers don’t have to figure out each week what the price will be. This eliminates the risk of buyers being “off the market” in their purchases and reduces transaction costs for buyer and seller.

The push by packers to sell more beef on formula was especially evident with middle meats this spring. According to USDA’s boxed beef sales reports for the seven weeks from April 23 through June 8, 59 percent of strip loins (all grades and types) were sold on a formula basis, compared to 43 percent in the same period last year. Similar year-onyear increases occurred for other middle meat cuts. Yet there were only minor changes in the proportions of total boxed beef sales. Formula sales in the seven weeks accounted for 45 percent vs. 44 percent last year while spot sales accounted for 38 percent vs. 37 percent last year Meanwhile, the price spread between the Choice and Select cutouts continued to widen in June, with continued Walmart buying. The grocery giant since May has been running new TV ads for its Choice program that imply that consumers can get a restaurant-quality steak from Walmart. Sales are presumably good enough for Walmart to have to keep replenishing its inventory of Choice beef.

The spread on June 21was $17.25 per cwt, the widest since Dec. 21’s $18.08. The spread has almost doubled since the end of May. But it is still well below the record for any day in June. This occurred June 9, 2006, when the spread was $23.52. A wide spread is positive for cattle feeders who market a high percentage of Choice-grading cattle on a price grid that differentiates between the two grades.

It’s fascinating that a company often criticized for the quality of its beef is now helping to underpin the Choice market.

Most analysts forecast that middle meat prices will decline in July and pull down overall cutout values. Continued extreme heat in parts of the country won’t be conducive to Americans grilling a lot of steaks. But the bigger factor might be whether retailers keep featuring steaks or turn to more chicken items and to cold cuts. Good July beef sales will be vital to stop live cattle prices falling into the $110 to $115 per cwt. area. — Steve Kay

(Steve Kay is Editor/Publisher of Cattle Buyers Weekly,  an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707/765-1725. Kay’s Korner appears exclusively in WLJ.)