Exceptions to the rule

Farm Forum

A number of years ago, noted meat scientist Dell Allen asked a great question: if we produce more Premium Choice beef, will it become “commodity” and no longer generate price premiums?

Today, with great improvements in quality grade, many producers are now posing the same question.

Many of us took Economics 101, where the instructor early in the course drew a supply/demand figure explaining how prices are established.

More of any commodity drives prices lower while less supply moves them higher. Certainly great examples of the latter would be the drought of 2007 driving corn prices up and the cowherd liquidation driving cattle prices higher in 2014. So we do know this supply/demand concept works.

But are we producing too much Choice and Premium Choice beef today? Let’s look at some numbers.

Former colleague and current CattleFax analyst Lance Zimmerman shared this historical perspective recently. Although cattle are grading well today (70% Choice and Prime), that seems to pale in comparison to 1987 when an amazing 97% graded Choice and Prime. It should be noted that not all fed cattle were graded in the 1970s and ’80s, so many that would have been Select were called “no rolls.” From that year to 2005, quality grade hit a skid and reached 57.2% Choice.

Of course, that’s not necessarily the whole story, because we sell pounds not percentages. In 1977, the U.S. sold 12.9 billion pounds of Choice and Prime beef, a high mark that stood until the 13.1 billion pounds of 2002. Since then, with the exception of 2012, the number has grown, peaking at 14.1 billion pounds in 2015.

With reduced cattle numbers, how could that happen? Simple answer: besides the run-up in quality grade, we’ve seen huge increases in carcass weights.

Regardless of percentages in the grading mix, we are producing the greatest amount of Choice and Prime beef in our history.

But as the legendary Paul Harvey always said, “Now to the Rest of the Story” and the things you likely did not know about beef supply and demand.

According to the old basic theory, all the extra high-quality beef being produced should mean premiums for hitting those targets are pretty poor. Well, anything but that is happening in 2016.

Urner Barry grading data on the price of boxed beef leaving the packing plants show some rather amazing numbers. The Choice-Select spread has averaged, year-to-date, around $9.50—but another number gaining value is the Premium Choice (Certified Angus Beef brand) over Choice spread, which has averaged $15 YTD. Put another way, the spread from Premium Choice to Select is $24.50, which on a 900-lb. carcass is an amazing $220 each. Clearly, the consumer is telling us they want more and will pay more for quality.

Besides dollars per cwt., another way of looking at this is total dollars. Steve Suther, CAB director of Industry Information, bi-annually gathers data on premiums paid by packers for CAB and Prime. In 2015, that number was a record $51.8 million dollars in grid premiums for quality. Yes, this gets all the way to the sale barn as black-hided and high-percentage Angus calves continue to bring premiums over all others in the ring.

Since the consumer is the source of all dollars in our industry, it follows that this entire chain of premium-dollar events comes from their willingness to pay for the right eating experience. Part of that certainly relates to quality, as Urner Barry data has CAB cutout averaging $2.25/lb. compared to $2.08/lb. for Choice.

Besides that, consumers clearly prefer beef as their protein choice, even as its price has risen.

Staff at Oklahoma State University publish a very useful monthly Food Demand Survey. Data from that report showed that in July 2016, consumers were paying $9.05/lb. for steak as compared to $7.12/lb. in that month of 2015, or 27% more. Comparable data for chicken breast showed $5.31/lb. in 2016 compared to $5.03/lb. in 2015, or 5.5% more. I’d rather be in the beef business.