It’s Prime time for the US beef industry. Excuse the pun, but how else does one describe how the industry is producing a record or near record amount of US Dept. of Agriculture (USDA) Prime beef week after week? This conveniently comes as the US economy continues to grow. Consumers who love great beef thus have more money to splurge on Prime beef. So the beef industry continues to have a strong incentive to produce more Prime.
The industry for years struggled to produce more than 3 percent to 4 percent Prime beef. For example, cattle graded only 3.21 percent Prime in the first week of November 2008. The same week last year saw a then-record 9.81 percent Prime. The industry slowly increased the percentage of cattle that grade Prime after 2008. But the biggest year-on-year increase was in 2018. The 9.81 percent far surpassed the 6.57 percent figure of the same week in 2017.
The year 2008 is a valuable reference point for another reason. That’s the year warehouse giant Costco introduced Prime beef to its members. To say its Prime program has been a huge success is an understatement. Between 18 percent and 20 percent of all Costco’s beef sales are Prime, according to Bob Huskey, Costco assistant vice president, meat department. Moreover, Costco’s Prime beef sales continue to grow by double digits every year.
Ironically, the recession was a key factor in Costco introducing Prime beef, after selling only Choice beef for many years. “When the economy took a big downturn, the supply of Prime beef got backed up because white tablecloth restaurants (the main users of Prime then) were losing business,” Huskey says. “Packers needed another outlet for their Prime beef. Introducing Prime in our warehouses allowed us to be a good partner with packers and offer a broader portfolio for them.”
Costco’s decision coincided with gradual growth in the percentage of Prime being produced. The dramatic improvement in the percentage in recent years is the result of numerous factors. The most significant of which is that the US beef cow herd now contains the highest quality genetics in the industry’s history. Cow-calf producers forced to reduce their herds because of drought from 2010 to 2012 sold their poorest cows and then rebuilt their herds with cows with much better genetics.
Relatively cheap corn prices the last few years have also encouraged cattle feeders to feed cattle to higher quality grades. Feedlot operators are also using more technologies to track how cattle are performing and have adjusted their feed rations.
In addition, more heifers were on feed and in the slaughter mix last year than in past years. This raised the percentage of Prime because heifers have the ability to add more intra-muscular fat (marbling) than steers with no additional back fat. The industry also continues to produce calf-fed Holsteins, which grade a higher percentage of Prime than any other breed.
Another factor is that last year saw little or no dip in grading percentages from April to June, which usually occurs because of a seasonal increase in calf-fed cattle in the slaughter mix. Either there were fewer of these cattle on feed than in prior years or they were fed longer and graded better. Packers also report seeing far fewer heiferettes and dark cutters in their slaughter mix than in past years.
The result of all these factors was that cattle graded a record 11.03 percent Prime the first week of December last year, beating the previous week’s record of 10.27 percent. The number has been above 9 percent every week since then except for the last week of January this year.
What is also interesting is that the growth of the Prime percentage has come not at the expense of the Choice percentage, but at the expense of Select beef. The third week of January this year saw a new record set for a combined Prime and Choice percentage of 83.02 percent with Select beef down to 14.20 percent.
Prime’s increase over the past several years means the price spread between Prime, branded and Choice beef has narrowed considerably. Prime beef for many years sold at a premium to branded beef of at least $20 per cwt and as much as $30 per cwt to Choice beef. USDA’s comprehensive boxed beef report for the week ended Feb. 22 revealed that Prime beef sold at a $6.80 per cwt premium to branded beef, an $11.24 per cwt premium to Choice beef and a $14.79 per cwt premium to Select beef.
The narrowing of Prime’s premium has been a boon for Costco and for restaurant and retail buyers looking for the highest quality beef but has come slightly at the expense of those that produce Prime and branded beef. But as Costco’s Huskey says, everyone is still incentivized to produce Prime beef because they still get more for a Prime-graded animal than any other.
Ruth’s Hospitality Group, which operates the Ruth’s Chris steakhouse chain, benefited from the lower Prime prices in 2018. It reported that prices were 8 percent lower than in 2017. This helped its net income reach $41.7 million, versus $30.1 million in 2017. A bigger driver was that its sales of $452.3 million were up 9 percent on 2017. But 2018 had one extra week compared to the previous year.
Costco carries Prime beef in all its 534 US warehouses. It sells at least three items in these stores, New York strips, ribeyes (in two forms) and top sirloins (also in two forms). But it sells a number of other items, depending on the location of its warehouses. Some high-end warehouses also sell Prime tenderloins based on region and availability, Huskey says. Some warehouses carry Prime tri-tips and boneless short ribs if they are available. Some of its Texas warehouses sell only Prime end cuts, he says.
“Prime commodity briskets, which we sell in a vacuum-pack format, have also been a pretty good fit for us,” he says.
Some of Costco’s international locations in South Korea, Japan and Mexico also sell Prime beef, as well as Choice beef, Huskey says. Japan for example sells a lot of Prime chuck rolls. “So we are also supporting the US beef industry overseas.”
Club store appeal
Costco purchases more than 1 billion lbs. of red meat, seafood and poultry annually. Huskey declines to say how large its beef volume is. But with Prime at 18 to 20 percent of those sales, Costco is one of the largest sellers of Prime beef in the US, he says.
“The growth of Costco’s Prime beef program has been all organic, and sales are pretty good in all regions where we have warehouses,” Huskey says. “We expect to see Prime sales continue to grow, based on availability, as the economy continues to get better.”
“As people get more confident in their finances, they splurge a little more on beef,” he says. “Besides, Costco has very high-end consumers shopping with it, with more disposable income. So it is a perfect match to offer Prime beef.”
That match will determine how successful a new Prime program will be for rival Sam’s Club. After a pilot program in 200 of its store locations in 2018, Sam’s now offers Prime beef at all its locations, including tenderloins, ribeyes, strip loins and whole briskets. Its success will depend on the willingness of enough of its customers to buy Prime beef, and on price.
Prime beef at Costco is already price competitive and sometimes cheaper than lines like Butchers Premium Angus (upper 2/3 Choice and higher) at Kroger. Local chains such as Super Lo Foods in Memphis occasionally offer Certified Angus Beef Prime boneless strip loins for $7.99 per pound. The entry of Sam’s Club into the Prime market will offer even more competition. This will benefit the US beef industry at all levels and Americans who love a top-quality steak at a reasonable price.