March 17, 2008

  

US higher grade beef cheaper than lower grade ones, but not for long 

 

 

Cattle and beef market analysts said this week's unusual inverted spread between choice and select beef is not sustainable and, in fact, was only in place for a few hours before it reversed itself.

 

These kind of inverted market conditions do not last, said Jim Robb, agricultural economist for the Livestock Marketing Information Center. Traders discover them right away and take advantage of the situation, putting price relationships back on track quickly.

 

Through the week, the reported boxed beef carcass cutout value from the USDA narrowed and finally had a situation where the select beef was reported at a higher average value than choice. Choice beef is considered to be better quality and nearly always commands a higher price.

 

The inverted situation in Thursday's midday report when select was $0.08 per hundredweight higher than choice lasted until the afternoon report when choice was again above select by $0.17.

 

Robb pointed out that the inverse was led by select ribs, which were $5.28 higher than choice product, and this is key to these situations. On the handful of days in history when the spread is inverted it usually is led by one primal cut.

 

But checking the history books to find out how common an inverted beef market is turns out to be a harder chore than it might seem. Markets and reporting methods change over time, along with the validity of the statistics.

 

Robb said that since mandatory price reporting came into effect in January of 2004, there have been no inverted days when comparing afternoon boxed beef reports from the USDA. There have been a couple of inverted midday reports, but these tend to be righted by afternoon.

 

The closest thing to an inverted market in the afternoon report since mandatory price reporting began can be found on July 2, 2004, when it reached $0.94 choice-over-select, Robb said.

According to Robb and other analysts, differences emerge when the market changes what it watches and the USDA alters its reports to keep up and remain relevant.

 

Andy Gottschalk, livestock market analyst at HedgersEdge.com and R.J. O&'Brien, said it's a combination of the overproduction of choice beef at a time of year when demand for middle meats still is soft.

 

The latest figures on choice and select beef production are from the week ending Feb. 23. At that time, choice beef carcasses amounted to 58.3 percent of total steer and heifer slaughter. Prime carcasses amounted to 2.48 percent.

 

That same report showed select carcasses totaled 31.12 percent of steer and heifer slaughter.

 

Richard Nelson, livestock market analyst at Allendale Inc., said the spread inverted because the market believes the economy is hurting demand for choice and prime beef.

 

Part of that belief comes from data that shows restaurant visits are down, Nelson said. They reason that if restaurant visits are down, then economic conditions likely are hurting demand for the higher-quality product and sending shoppers to competing meats.