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Agricultural News

CAB Momentum Pays Record Premiums: Nearly 30% of Total Paid Since 2011

Wed, 12 Feb 2014 11:06:24 CST

CAB Momentum Pays Record Premiums: Nearly 30% of Total Paid Since 2011
Market premiums paid for cattle that earn the Certified Angus Beef ® (CAB®) brand trademark more than doubled recent annual totals to reach the neighborhood of $50 million.

The brand's 10 years of increasing demand and seven years of sales records left some Angus producers wondering how that affects their bottom line. Results from the biennial survey of CAB-licensed packers in January shines a halogen beam on the answer.

There were plenty of hints. In 2011, a 45% increase in grid premiums to $32.3 million did not in itself constitute a trend. But USDA's mandatory reporting, never known for overstating, showed 2012 starting with a CAB premium of $8 per hundredweight (/cwt.).

Apparently, that mark was often revisited in 2012 to bring about the 60% single-year further increase to a record $51.6 million paid. The previous record of almost $40 million was 10 years earlier in a turbulent world market affected by bovine spongiform encephalopathy (BSE or "Mad Cow Disease") and trade barriers.

The $47 million in CAB premiums paid in 2013 was more than double the $22.9 million paid in 2010.
All of the data comes from CAB's "Here's the Premium" project that has surveyed packers to gather total dollar grid premiums paid since 1998. They report totals for the aggregate, and although Certified Angus Beef LLC tracks volume sold by packer, it does not know the share of cattle each buys on a grid.

The top four CAB packers produced more for the brand in each of the past two years and paid record amounts to producers. Even as cattle numbers have declined, more and more sell on value-based grids that pay direct CAB premiums. The share of live cash trade to grid, contract or formula pricing moved from a balance in 2005 to 67% grids by 2011 and last year Cattle-Fax reported that number at 76.9%.

Boxed beef prices were a concern for commodity producers early in the last decade, as the trend line for USDA Choice beef met resistance at $150/cwt. Some saw that as a sign to forget trying to please consumers and focus on cost cutting. Others focused on making beef worth a higher price. CAB cutout climbed higher across five years, from less than $147/cwt. in 2009 to more than $203/cwt. last year.

Packers say their cash bids reflect estimates of potential for CAB and USDA Prime grading cattle, too. Regardless of how the cattle are sold, premium quality pays.

"Demand for branded and premium products from the consumer has increased as the economy has improved, and food service is probably the biggest winner," says Alan Smith, director of protein research and risk management for CattleFax.

"Given higher prices, consumers want more assurances of a good eating experience and are willing to pay for it," he says. "Everyone who handles or supplies the premium product sees revenue or margin gains."

Missouri economist Scott Brown agrees. "The work invested over the years has resulted in CAB's position as a brand consumers trust for a consistent and great eating experience," he says. As all beef prices push still higher Brown says, "the market advantage for CAB, and that momentum, will only accelerate."

Looking at CAB grid premiums paid over time, it took nearly 30 years to garner half of the $450.8 million paid for the share of 40 million CAB-accepted cattle sold on grids, while nearly 30% of that total was paid in the last three years.

Brown says it's important for Angus producers to keep their focus. Balancing supply and demand has been a CAB hallmark for 35 years, but at the scale of selling 865 million pounds per year, much hangs in the balance.

"If demand for CAB product outstrips supply, consumers will begin to search for alternatives," he says. "It's clear that Angus producers' focus on genetics that include marbling has put money in their pockets, but they must work to ensure there is an adequate supply, or risk losing those premiums."

Of course, most producers don't own their calves through the finishing phase, but information has integrated the market so that some premium reaches everyone who makes the effort to aim for quality. Dividing total CAB grid premiums over the last few years by the number of cattle accepted for CAB equates to nearly $15 per head, but many ranchers realize more like $15/cwt.

On the other hand Brown says, "You can begin to see the end of the market for average cattle in this country," other than growing discounts. But solutions are in reach: "Advances in genetic prediction and breeding technologies make a step up to premium production an easy and relatively low-cost prospect for most commercial producers."

Angus breeders like Sydenstricker Genetics manager Ben Eggers, Mexico, Mo., say the Certified Angus Beef ® (CAB®) brand's impact, and their ability to respond, grow in tandem with the record premiums paid.

"In the earlier days of CAB we often heard, "Where's the premium?" I haven't heard that in quite a while," Eggers observes. "The value of superior carcass merit is well documented now, and many top commercial cattlemen have reaped the benefits. As that 'pull through' effect grows even stronger, I think we'll see even more increase in beef demand as the average quality increases."

At the calf level, the soaring premiums move past any perceived "black hide" advantages.

"The CAB premiums help explain the huge price spreads we've seen lately based on quality," says Malta, Mont., seedstock producer Dave Hinman. "It's been $20, $30/cwt. or more on the same weight cattle."

The difference of nearly $200 per head shows great buyer confidence, he says. "The feeder couldn't afford to pay that if he didn't know a lot about the calves. They have to watch everything pretty close-"

Hinman's bull customers do, too, and their solution is to find balance.

"We put all the numbers in our catalog and they look at all of them," he says. "They want it all, just like their next buyer, all the way to the people standing in line to be seated at a steakhouse. And people will pay to get what they want."

Science, performance data and common sense used in concert can create those genetics. "But you can't forget any one of those," Hinman says.

Having grown up in the meat business, Dick Beck, manager of Three Trees Ranch, Sharpsburg, Ga., wonders why some cattlemen pay scant attention to beef quality potential. Sure, they're concerned with fertility, fleshing ability and other maternal traits not easily measured, but that's no reason to ignore the carcass side.

"The cowherd traits have a big economic impact but they're not very heritable. Carcass traits are highly heritable, so it is easy to make progress or lose ground," he notes. "Keep working on the cowherd, but why would you walk away from making progress on a trait that's easily improved?"

Ability to produce premium beef can make an Angus bull worth at least $10,000 more than average, Beck notes, doing the math: "If you get 100 calves in his life and 40 of them grade Prime, that can add $8,000; if 40 more make CAB, that could be another $3,000."

He says "commodity-minded" producers debate the ups and downs of the Choice-Select spread. "That doesn't mean anything to us-if we're not making at least Choice cattle, we're not in the Angus business."

Like Hinman, Beck says the most-demanded bulls are the ones that do it all, including quality grade.

"We're finally to the point where we can design a system that produces premium beef every time if you do everything else right," Beck says. "That's exciting."

Don Schiefelbein, Kimball, Minn., agrees. His family buys calves from their bull customers and finishes 20,000 head per year to sell on a grid.

"Making the cattle do 85% or 90%, even 100% CAB was unheard of just five or six years ago," he says. When they do, as a fair number of loads did last year, the breakeven equations go out the window.

"Say you have two steers and one makes CAB and one doesn't," Schiefelbein narrates. "It costs nothing more for the one that earned the premium-it's all extra dividend, added value built in. That's why breakevens mean nothing when you try to factor in 80% CAB."

When all calves are selling for record-high prices is "the perfect time for genetic upgrades," he says. "Get your genetics in order to add value to your calves. It's a sweet time to invest for a whole new level of prices."

Some producers bought bulls for $2,500 or less in 2013, but in January, a set of heifers from the Schiefelbein feedlot grossed $2,500 per head on the rail, nearly all Prime or CAB. They were from a herd that had stacked high-marbling Angus genetics for three generations, the standing recommendation for all bull customers and one that can take decades to achieve across a herd.

The market says it's a goal worth pursuing.

By Steve SutherDirector, Industry Information, Certified Angus Beef LLC



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