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CME: Choice Beef Cutout Value Continues to Perform Below Year Ago Levels

10 June 2016

US - The Choice Beef cutout value has performed below year ago levels all year so far. As of the end of May, the weekly average Choice cutout value was at $223.19 per cwt., 14 per cent below a year ago, write Steve Meyer and Len Steiner.

The weekly Select cutout value was at $204.78 per cwt., 17 per cent below year ago. This is not surprising as fed cattle and therefore beef supply have increased relative to last year’s levels.

Within this current cutout value however, middle meats have been performing relatively well and at the same time the Choice-Select spread has been widening significantly since the beginning of May. To review quickly, a beef carcass is fabricated into seven primal cuts, specifically the brisket, chuck, flank, loin, rib, round, and short plate.

The USDA-Agricultural Marketing Service (AMS) derives values for primal cuts from a weighted average of the associated sub-primal (wholesale cut) reported prices. AMS then calculates a carcass cutout value using the percentage yield contribution to the total carcass weight and calculated value of each primal cut.

The middle meats, i.e. loin and rib, together make up 32.67 per cent of the beef carcass, according to AMS. This is compared to the chuck and round (end cuts) that together make up 52.04 per cent of the carcass.

As of the end of May, the rib and loin Choice cutout values were only 7 per cent and 8 per cent below year ago levels, respectively. These prices have stayed relatively strong compared to the end meats which were down 18 per cent-20 per cent year-over-year. Within the Select cutout value, the rib has stayed relatively strong, down only 6 per cent year-over-year.

The loin cutout was down 16 per cent though, and the majority of end cuts were down 20 per cent-25 per cent (the brisket however was down 12 per cent). Using these values to analyze the Choice-Select wholesale spread (difference between the Choice cutout value and the Select cutout value), as of the beginning of June this spread was $21.82 per cwt., the largest it had been since May of 2004.

Looking at the year-over-year changes in the values, the Select cutout has decreased relatively more than the Choice cutout. Additionally, the Select cutout is seeing more weakness in the loin value than the Choice is.

Overall, the widening Choice-Select spread appears to be mostly demand driven. As cattle and therefore beef prices decline, relative to last year, people seem to be more willing to pay a relatively higher price for Choice beef items compared to Select.

The premium of Choice over Select cutout value may begin to erode from its lofty level soon as it typically does in late June and July. There are many factors at play within the movement of the cutout values including: beef imports, foodservice sales, the domestic economy, price of competing proteins, and beef production rates. Still, if the demand for Choice holds-up, that premium over Select could easily remain above 2015’s for the balance of this year. 



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