July 6, 2012 Choice Select Beef Spread Explodes
CME reporters note that the spread between the Choice and Select beef cutout values has exploded since mid-April. This is not a real surprise since the spread usually grows from late winter through the spring. The unusual aspect of this year’s seasonal shift is its magnitude. The normal increase is $6 to $8/cwt. and the spread usually peaks in mid-May. This year’s increase has been $18 and the peak, they think, occurred two weeks ago.
The spread between the two most common grades of beef is, as is any price, driven by relative supplies and demands. The supplies of Choice and Select beef depend, of course, on the total supply of cattle and the percentages of cattle that receive the grades.
Those percentages changed dramatically from 2007 through 2009 due to a number of factors including the adoption of mechanical grading systems, changes in feeding practices, the wider use of Angus genetics and measurement systems that allowed marbling to be observed in live cattle and thus used as a criteria for breeding stock selection.
The trend has pretty much ended since 2009 but considerable seasonal variation remains. As can be seen, a primary reason for the normal summer rally in the spread is the seasonal decline in the percentage of cattle that grade Choice. Lower Choice supply means higher Choice prices. At the same time, Select supplies grow driving Select prices lower. This year has followed that normal pattern.
If that holds, we will see the Choice percentage increase for a few weeks before decreasing further through September. But is that the driver this year? We don’t think so because the shift in values has not been driven by all Choice cuts. In fact, the main drivers have been the prices of Choice middle meats. The
chart june 6 charts shows the 55% increase in boneless strip loins. The price of ribeyes has increased by about 25%. Both —and the spread — appear to be peaking.