by Dr. James Mintert, Professor of Agricultural Economics, Kansas
State University
Cattle Feeders Are Producing More High Quality Cattle
Is there a structural shift in the slaughter cattle market underway?
It’s starting to look like it. Cattle feeders are producing
a larger proportion of Choice and Prime cattle than in the past. And
it looks like that increase is having an impact on the Choice-Select
spread.
So far this fall the Choice-Select spread has failed to rebound as
much as cattle feeders hoped. During mid-October the heavy Choice-Select
spread averaged just $3.35/cwt., 89 percent lower than a year ago.
So far this year (through mid-October) the heavy Choice-Select price
spread has averaged $9.18/cwt., down 16 percent compared to last year’s
$11/cwt. average. One reason for the decline in this year’s
spread could be an increase in the proportion of cattle slaughter
that graded Choice or higher.
The percentage of cattle grading Choice has been climbing over the
last several years. For example, the percentage of cattle grading
Choice or higher averaged 50.6 percent during 2001. During 2002 the
percentage of Choice and Prime cattle in the slaughter mix rose to
51.8 percent. The shift toward more high quality cattle in the slaughter
mix continued during 2003 as 52.4 percent of federally inspected cattle
graded Choice or Prime. And during the first nine months of 2004 the
percentage of cattle grading Choice or higher rose again, averaging
53.9 percent.
The difference between this year and last year is even more noticeable
when September 2004 is compared to September 2003. During September
of this year 53.4 percent of slaughter cattle graded Choice or higher,
compared to just 49.5 percent last year. That 16 percent increase
in the percentage of cattle grading Choice or Prime goes a long way
toward explaining why this fall’s Choice-Select spread is so
much narrower than last year.
Weakness in this fall’s Choice-Select spread is likely attributable
to more than just the increase in the proportion of cattle grading
Choice or Prime. During 2004 the absence of Japanese buyers in the
U.S beef market has affected demand for high quality beef cuts more
than lower quality cuts. As a result, the U.S. beef industry’s
inability to export beef to Japan could help explain part of this
fall’s narrow Choice-Select spread. But the rising proportion
of carcasses grading Choice or Prime clearly had an impact on the
price spread.
Grid Based Pricing Encourages Choice Carcass Production
Will the percentage of carcasses grading Choice or Prime continue
to rise? That’s a good question. Answering it requires an improved
understanding of why cattle feeders are producing more Choice and
Prime carcasses. There are a multitude of reasons for the change in
the slaughter mix, but the increasing use of grid based pricing, which
typically rewards increased Choice carcass production, is likely a
major factor. Given that grid-based pricing is likely to become even
more prevalent in the future, it would not be at all surprising to
see the industry produce an even higher proportion of Choice and Prime
carcasses in the future. And that could mean a narrower Choice-Select
price spread. ©
