“It basically says that we'll consume the amount of Choice beef we consume despite the price. If we produced a lot more though, it would probably take a lower price to move it. At least that's what a year's worth of boxed-beef transactions say,” explains Sawyer. “As supply tightens, the price of either category would be expected to increase. This price increase would have minimum impact on the amount of Choice product sold, but might have a large impact on the volume of Select product moved.

“It's important to note that when both Choice and Select supplies increase by an equal amount and price is reduced within both product segments, a slightly greater reduction in the price of Choice beef compared to Select might be expected,” Sawyer says.

He adds, “The demand inelasticity for Choice also supports the volatility we've seen with the Choice-Select spread during the past 18 months when it has ranged between $3.50 and $30. A fairly small change in supply might result in a fairly large swing in price.”

Demand defines quality mix

“What surprised us the most was just how stable the distribution of quality grades has been, relative to the population of cattle harvested during the past 10 years. It appears the industry has achieved an optimum threshold mix of Choice and Select carcasses for the market,” Rhoades says.

According to the researchers, the significant discrepancy in elasticity between Choice and Select also suggests they aren't necessarily strong substitutes. As supply tightens, the same amount of Choice is demanded, albeit at a higher price. However, as prices increase, the quantity of Select product demanded diminishes, suggesting that consumers substitute with non-beef products.

None of that belies the opportunity for individual producers to benefit by increasing the percentage of Choice cattle they produce.

“Individually, if producers think they can increase the percentage Choice at a cost lower than the premium paid for it, there is opportunity,” Sawyer says. “The two demand lines suggest Choice and Select really represent two different commodities, though. As we ‘decommoditize’ portions of the market, we start to reduce the commodity characteristics of the market as a whole.”

In other words, as brands have taken center stage, and as Prime, Choice and Select have emerged as de facto brands unto themselves, they're governed less by the pure commodity principles that drove them in the past.

Moreover, the data suggests the apparent sluggishness of the industry to grow more Choice-grading carcasses may be influenced as much by market demand as any genetic or management constraint.

Rhoades emphasizes, “The large increase in Select production during the late 1980s and 1990s doesn't appear to be offset by reductions in Choice production during the same time span. This suggests the increase in Select-graded product was a result of grading more cattle, not a result of declining overall marbling in the population.”

In fact, Sawyer explains, “As an industry, we have a tendency to talk about the good old days, but what good old days are we talking about? In 1956, about 28% of the carcasses produced in the U.S. were graded Choice. Last year, over 50% were. So it looks to me like we've made tremendous progress.”

Bottom line, Rhoades says, “It's difficult to support the hypothesis that beef quality is declining, or that the slaughter mix is decidedly non-optimal.”