A close look at beef markets and the retail case
The USDA Choice-Select spread for box beef went negative this week. Why? Don’t we all like Choice better than Select beef? Doesn’t it cost more to raise Choice than Select beef? Hasn’t the cattle industry spent years and many dollars trying to figure out how to get more cattle to grade Choice? Is there some conspiracy here by the packers and retailers? Let me try and answer a few of these questions. Not all consumers like Choice better than Select beef. In fact, at equal levels of tenderness, many prefer Select. Therefore retailers have found that they have consumers who are loyal to Choice and those who are loyal to Select beef. If we view the Choice market and the Select market has separate but related markets, let’s examine what has been happening in each market. Over the last year there has been an increase in the percentage of cattle grading Choice. This may be correlated with feeding cattle to heavier carcass weights, but it is also likely due to improvements in the grading system. Never the less, if nothing else changed in the world and you had an increase in the supply of Choice beef and therefore a reduction in the supply of Select beef, you would expect Choice beef prices to decline and Select beef prices to increase. Now consider the demand side of the market. If my income has been reduced because of the economy, or if I fear that it may be reduced, than when I go to the market to buy a steak and I see higher priced Choice steak and lower price Select steak, perhaps I choose the Select steak now compared to choosing the Choice steak in the past. If my budget is even tighter, perhaps I buy ground beef instead of a steak, and there generally is not a segregation of Choice and Select ground beef. The resulting demand pressure would be reduced demand for Choice and increased demand for Select, which would further pressure Choice prices lower and Select prices higher. That is how we can arrive at a zero spread, or even a negative spread for a short time period as retailers may need more Select product and less Choice product to refill their meat case. No conspiracy involved, just the fundamental market forces of supply and demand.
To link to the entire article and view corresponding charts, see the In the Cattle Markets e-newsletter.