9 August 2010

4 minute read

North America

Changing Trends in the Choice-Select Spread

One discussant, Mark McCully of Certified Angus Beef, pointed out that the number of carcasses accepted into a branded programme has grown to a point that the Choice label is not as pure a price as it once was and thus is skewing the Choice-to-Select spread (C/S) – branded beef is specified separately from Choice beef in USDA Agricultural Marketing Service reporting.

Using data from the National Comprehensive Boxed Beef Cutout report (LM_XB463) – which reports the price and load volume for Prime, Branded, Choice, Select and ungraded boxed beef – this appears to be unfolding. From 2004 to 2009 the number of branded loads has increased 122 per cent on a yearly basis while Choice loads have grown 52 per cent. Over this same time period the C/S spread has drifted lower. Still, the number of boxed beef loads that only grade Choice make up a larger portion of all graded and ungraded beef. For the month of July 2010, the number of Choice and branded loads accounted for 27.7 per cent and 10.5 per cent of the total load volume, respectively, compared to 29.7 per cent and 6.8 per cent in July 2004. Figure 1 reports the percentage of all loads that fall into the Choice and branded beef category from the 463 report. It shows that since 2004 the proportion of Choice beef has been relatively flat while branded beef has been increasing in volume. Though not depicted in the chart, recently the volume of Select graded beef has fallen likely accounting for the upward movement in branded beef where the quality of those carcasses that once graded in the top end of the Choice and Select grades have improved and moved into the next highest category.

So what are the implications? Given the framework of most branded programs, which accept higher quality Choice product (typically Upper 2/3 Choice), these are being priced under a different category and most often at a premium to the non-branded Choice category beef. As the proportion of this product moves from the Choice category to the branded category the quoted Choice price will not reflect the actual value of all Choice carcasses and will reflect the value of the lower quality Choice product. We often look to the C/S spread for indications of the demand for Choice beef. Given the growth of branded beef this indicator appears to be morphing into a less reliable resource.

Figure 1. Proportion of Choice and Branded Boxed Beef to Total Load Volume of Prime, Branded, Choice, Select and Ungraded Boxed Beef

The Markets

Light cash trade highlighted this week as sales were slow to develop. Live cattle in the Texas Panhandle, Kansas and Nebraska all were at $93, off about $2 from last week. Dressed cattle in Kansas and Nebraska sold at $148. In Oklahoma City, feeder steers and heifers were steady to $1 higher; steer calves were called steady and heifer calves were steady to $3 higher. Live cattle futures started the week down with uncertainty regarding cash. A slight recovery was seen Wednesday and Friday but this was not enough for prices to be higher week-over-week. Feeder cattle took advantage of lower corn early in the week, but by week’s end lower live cattle and higher corn pushed prices lower. Corn was under pressure on Monday and Tuesday with favorable weather and crop ratings being reported. The mood shifted mid-week as wheat took center stage and pulled corn and soybeans along due to the uncertainty regarding global wheat supplies, especially in the Black Sea region. The boxed beef cutout value reached a weekly peak on Tuesday and then declined the remainder of the week. The Choice-to-Select spread, currently at “normal” levels of about $8, was down just a bit from last week but much higher than a year ago.