February 18, 2008

 

USDA choice/select beef spread very narrow but seasonally low

 

 

The spread between the US Department of Agriculture's reported cutout prices for choice and select beef is uncharacteristically narrow currently, but it's hitting its low point right on schedule, market analysts said.

The USDA reported its choice/select spread at midmorning Friday (February 15) at US$1.58, with choice at US$149.45 per hundredweight and select at US$147.87.

 

As unusually narrow as the choice/select spread is, however, it's not a record, said Don Close, independent market analyst. The five-year average for the second week of February is $4.41, making Friday's spread even narrower than the average. But on Feb. 17, 1995, the spread was $1.75, and on Jan. 31, 1998, the spread was at $1.05. On Feb. 20, 2004, the spread was inverted by $0.31.

 

"The choice/select spread historically has a lot of value at this price level," said Troy Vetterkind, of Vetterkind Cattle Brokerage, in an e-mail.

 

"The spread clearly is at a seasonally low ebb of choice consumption (for the year), but it's at a prime point for booking choice product for the grilling season," Close said. Some buyers look forward to this time of year, he said.

 

The spread is narrowing because of price reductions in choice middle meats since the holidays and Valentine's Day, Vetterkind said. It shouldn't get much narrower.

 

"Rather we will likely see a ... price reduction in both choice and select cutout values from current price levels," Vetterkind said.

 

The choice/select spread will narrow under the influence of two market forces, Close said. Either the market is being oversupplied with choice beef or the buying interest for choice beef is very poor.

 

While actual demand from an economist's point of view is very hard to measure, especially in the short run, buyers have pulled away from the product in a seasonal retreat to lower-priced proteins for consumers, market analysts said.

 

In addition, while winter weather slows cattle growth and reduces the percentage of carcasses that grade choice, it's always surprising to Close just how many will put on enough intermuscular fat to grade choice in spite of harsh weather.

 

Vetterkind agreed that choice percentages still were pretty good. "We were killing 56 percent choice cattle as of last week and this is up from killing 53 percent choice cattle during the first week of December."

 

Vetterkind thinks that is a function of killing the last of the heavier weight yearling cattle that were placed during August, September and October.

 

Now, as the market moves into March, the slaughter will tilt toward killing lighter weight cattle because of higher corn costs and because the industry will be killing younger cattle from fall placements, Vetterkind said. At the same time, the industry should begin to see better choice middle meat demand from the retail/wholesale sector as they secure their spring/summer grilling needs.

 

Both analysts expected the choice/select spread to begin to widen from current price levels.

 

This is likely to be supportive to cash cattle and futures prices since the Chicago Mercantile Exchange contract is a 55 percent choice contract, and choice cattle will begin to get harder and harder to find.