Since early September, the spread widened significantly on a weekly basis to just more than $14 per cwt the first week in October (Weekly National Carlot Meat Report). Several factors contributed to the widening spread: Marketings from feedlots of 1,000 head or more have been such that fed cattle have not been allowed to put on any extra weight – partly due to high costs of gain, adversely affecting total beef production.
Feedlots, however, have remained relatively current despite heavy placements of feeder cattle – especially the drought-induced light-weight placements – for much of the past year or longer. Shortened feeding periods and some pulling of cattle forward (marketing them earlier in the feeding/finishing period) have also resulted in slightly fewer carcasses grading Choice and more Select grading carcasses, which has affected the Choice-Select spread since July.
Demand by restaurants may also have slowed in recent months as is evident from the Restaurant Association’s Restaurant Performance Index – and is lackluster at best. As a result, demand for many higher priced cuts has likely been reduced. Yet, with more cows in the slaughter mix, higher-priced cuts make up a smaller share of total beef supplies, which increases the relative value of the higher end cuts and lowers the value of lower grading meat. As a result, prices for both Select beef and grinding beef have moved lower, and the Choice-Select spread has widened.
Volatility in retail prices is further due to the impact the drought-induced liquidation of cows is having on relative supplies of higher-end cuts. Estimated monthly average prices for Choice retail beef increased 9 cents per lb., or 2 percent, from July to August 2011. At the same time, monthly average five-area fed cattle prices increased 2.6 cents per lb., or 2.3 percent, while average Choice wholesale cutout values increased by 2.7 cents, or 1.5 percent.
These general price increases followed volatility in all prices, with atypically rapid increases in retail prices from December 2010 to May 2011, followed by a two-month decline, before increasing again. At the same time, cattle and wholesale cutout values followed atypically more modest fluctuations after peaking in April.
Retail prices typically adjust more slowly than cattle or wholesale beef prices because of lags in production cycles for cattle and beef at various levels. At the same time, cattle and beef prices at all levels tend to adjust more quickly when they are increasing.