There’s a self-reinforcing dynamic occurring to which beef producers are responding. More marbling means more dollars, which subsequently generates more product in the marketplace. However, that extra supply hasn’t dampened the premiums for the product. Rather, it seems the more consumers get, the more they want.
More production of higher quality, more desirable products establishes better consumer demand. In turn, better consumer demand creates the need for even more high-quality beef.
Even in the midst of tighter supply, higher prices aren’t a given. If demand is waning, tighter supplies don’t necessarily translate to pricing power. The beef industry learned that lesson from 1980 to 1998 — the industry was essentially forced to increasingly discount its product to clear decreasing volume over time.
That’s not the case today. The beef industry now has pricing power, consumers are clamoring for the product, even at a time when they’re particularly sensitive about higher prices.
Marbling Is The Anchor
It starts with the cattle — and ensuring the price signals match what’s underneath the hide. Marbling is the difference maker when it comes to consumer satisfaction, subsequent spending and the total dollars available to the industry.
Today, it’s not commodity Choice or Select driving the business. The Choice/Select spread is increasingly irrelevant in the marketplace. It’s where we’ve been.
The true threshold of value differentiation is modest-or-better marbling. That’s the better cutoff in terms of determining margin contribution. That’s where we are and will continue to go.
The following charts tell more of the story.
Choice/Select Spread Is Increasingly Irrelevant
In late July, the Choice/Select spread was $20 per cwt, and it had been steadily widening in the preceding weeks, standing at its widest point since Christmas.
The Branded/Choice and Prime/Choice spreads were $10 and $22, respectively, and widening. That directional change plays a key role in weekly pricing — it’s not today that matters, but rather some anticipation of where the beef market will go.
But it’s not the magnitude of the Choice/Select spread that’s important; that spread is increasingly irrelevant in the marketplace. Neither commodity Choice nor Select is driving the business.
More significant is the question of why the measure even remains a benchmark of market indicators. For example, USDA regularly features the Choice/Select spread in their National Daily Cattle and Beef Summary.
Prime Has Basically Become A Category Unto Itself
There are several points of interest in this chart derived from USDA’s Grading Dashboard:
1. Commodity Choice has remained relatively steady at an annual average of 41% since 2011. However, the mix around that flat line has dramatically changed over time.
2. Select volume has steadily slid from 28% to 13% of the slaughter mix.
3. CAB + Prime volume has replaced the difference, increasing from 20% to 35%.
In other words, the Choice/Select spread represents only one out of eight head, while premium grading cattle are nearly triple that volume and make up more than one-third of total slaughter.
Since 2005, Prime and Branded sales have accounted for 60% of the new dollars coming into the business. During that same time, the annual growth rate for the Prime category exceeded 14% and the Branded category was more than 10%.
Prime has seemingly become a category unto itself. It’s consistently grabbing a bigger portion of market share.
It’s been said but is worth repeating: Consumers are sending a clear message — quality really matters.
Grid Marketing: Ensure the Price Signals Match What’s Underneath the Hide
The concept of supply elasticity generally reflects the responsiveness of the supply chain to changes in price (demand) for its product. That is, the potential to capture added revenue (via individual carcass pricing) has driven cattle feeders to increasingly market cattle via the grid versus selling live.
That has established some important changes in the business. Most notably, the bulk of added revenue is tied to premiums at the top end of the quality grade mix (upper two-thirds Choice and Prime) in response to demand.
