Agricultural News
Wide Choice/Select Spread Reflects Changing Beef Market Conditions
Mon, 17 Oct 2011 11:59:40 CDT
Recent changes in wholesale beef price levels and relationships indicate a number of changes occurring in beef markets. According to Dr. Derrell Peel, Oklahoma State University Extension Livestock Marketing Specialist, most obvious is the dramatic increase in the Choice/Select spread in the past two months. Since a summer low of $3.30/cwt. the Choice/Select spread has swelled to a weekly average of $16.68 this past week. This spread is the largest since the highs in December of 2006 and 2007.
The Choice/Select spread typically widens at the end of the year but the increase has been larger and earlier than usual this fall. The Choice/Select spread is the net difference in prices from two markets: the Choice and the Select beef markets and is thus influenced by the supply and demand in either market. Thus, in general, there are four ways for the Choice/Select spread to change. For example, an increase in Choice demand; a decrease in Choice supply; a decrease in Select demand; or an increase in Select supply could all cause the Choice/Select spread to widen. Because of the many factors that may be involved, it is not always easy to understand what is driving changes in the Choice/Select spread.
Undoubtedly there are several factors behind the $13/cwt. increase in the Choice Select spread over the past 8 weeks. First, total beef production is falling; beef production has been below year ago levels for 8 of the last 9 weeks. Secondly, cow slaughter is currently a higher percentage of total slaughter compared to last year which means that the decrease in fed beef is even more pronounced than the total would imply. A third factor is that the Choice grading percentage in 2011 has remained mostly even with year ago levels.
For the past several years, a growing Choice grading percentage has contributed to a generally narrow Choice/Select Spread. These factors all combine to result in lower total beef supplies and proportionately lower Choice supply compared to Select beef supply. The unusual demographics of this year contributed to these changes and more impacts are expected in the coming months. The drought forced many younger, smaller cattle into feedlots, which is likely to temper carcass weights and may continue to limit Choice grading percent. High feed costs and lack of feedlot profitability is a growing incentive to minimize days on feed which is likely to further limit Choice grading percentage.
Wholesale beef values indicate some strength in middle meat demand in recent weeks. Prices for Tenderloin and Ribeye products have risen above year ago levels in recent weeks, while prices for Chucks and Rounds continue well above last year's levels. Beef demand appears to be improving, albeit slowly. The forthcoming decreases in total beef production and especially for Choice beef supply will continue to push wholesale and retail beef prices higher and provide a critical test of demand. It is unclear just how high beef prices can rise before demand will be choked off. Clearly, the foreign component of demand in terms of beef exports has been critical for the past 24 months.
While export demand is expected to remain strong into 2012, it is unlikely that we can maintain the 20-30 percent pace of increase of 2011. Domestic beef demand is still sluggish but sharp reductions in supply are expected from late 2011 through 2013. With a strong ground beef demand as a base, tight supplies of Choice middle meats along with strong exports of some high-end products, may continue to support higher wholesale and retail beef prices in general, and at the same time, strong middle meat prices and a relatively wide Choice/Select Spread.
Our thanks to Dr. Derrell Peel for this latest article on changing beef market conditions. This article was part of the Cow-Calf Corner Newsletter that is sent out by Dr. Peel and Dr. Glenn Selk on most Mondays.
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