Fewer cattle equals more Prime beef.
It doesn’t take a mathematician to think, “Wait, something doesn’t add up.” Yet, that’s the reality in today’s marketplace. Fed steer and heifer harvest was down 6.2% for the first 32 weeks of the year, but it wasn’t an even distribution across all quality grades (See Chart 1).
“In pounds of Prime, we’re up 2.5% to 3% [from 2013], and adding in Premium Choice, it’s still pretty much a wash,” says Mark McCully, vice president of supply for the Certified Angus Beef ® (CAB®) brand.
Looking at lower quality grades, Select and No-Roll production had decreased 12% to 15%.
“We’ve taken all that supply away from Select. You’d think that would be supportive to a narrow Choice-Select spread,” he says.
Although the Select discount has declined compared to last year, the long-term trend (See Chart 2) points to a widening valuation gap in beef quality grades, McCully says. Four years ago, an 850-pound Prime carcass would fetch $190 more than Select. In 2011, that gap suddenly widened and it trends to a figure 65% higher in the early fall, a $314 premium.
“Prime graded beef has enjoyed a small increase in quantity and about a 13% increase in premium relative to Choice year-to-date, compared to last year,” says ag economist Ted Schroeder, Kansas State University. “All indications I have are that Choice demand has so far been stronger this year than last, suggesting Prime demand is up even a bit more.”
Even as the U.S. beef industry is producing more highly-marbled product, it still holds a strong price-value relationship for consumers.
“The first beef products that would see demand decline are products that have stronger viable substitutes,” Schroeder says. “Generally, high-quality branded Choice and Prime steaks have less viable substitutes than say ground beef, roasts, or Select steaks.”
That’s why when beef supplies are tight, higher grading beef has “more resilient demand,” he notes.
“You hear this a lot, but it’s so true. As harvest numbers have gone down, prices at the consumer level have increased, and they’re still willing to pay more for our brand,” McCully says. “This is telling me that we need to bring on the higher quality beef. History has proven it, and predictions for the future support the idea that if you aim your herd for that target, you will be rewarded.”
Source: Certified Angus Beef ® (CAB®) brand