CME: Sharp Increase in Proportion of Fed Cattle Grading Choice

Mon, 03 Feb 2014

US - There has been a sharp increase in the proportion of fed cattle grading Choice since last summer. That is the message of an update released last week by our friends at the Livestock Marketing Information Center (LMIC) in Denver, write Steve Meyer and Len Steiner.

The increase has been accompanied by a sharp drop in the proportion of cattle falling into the next highest quality grade, Select. In the most recent data (ie. for the week ending January 18) from USDA’s Agricultural Marketing Service, the percentage of cattle grading Choice rose by 4 per cent from the same week one year ago while the percentage grading Select fell by 3.5 per cent.

As can be seen in the top chart below, the percentages of cattle falling into these two grades are at record levels — highs for Choice and lows for Select. These shifts are a primary driver in the strength of the Select grade cutout value the past few weeks: There simply is not as much Select grade product available. The result has been a narrowing of the spread between the Choice and Select cutout values.

The most interesting aspect of the recent grading percentages that the LMIC authors point out is the timing of the increase — especially relative to the withdrawal last summer of the feed additive Zilmax. Recall that the product was withdrawn in late August by its manufacturer, Merck, after concerns were raised about the impacts of the product on animal welfare in general and mobility in particular.

Now there are a lot of factors that contribute to the number or proportion of cattle that will grade Choice but it appears to us (and to the LMIC authors) that the timing of the Zilmax withdrawal and the increase in Choice grading percentage are more than coincidental, especially when one considers the magnitude of the year-on-year and year vs. history increases. From 1 January 2013 through the end of August 2013, the percentage of cattle grading Choice had exceeded the year before by 0.3 per cent. From 1 September through 18 January 2014, that percentage is 3.6 per cent.

So why the downtrend this year? Packers have needed more cattle and the narrowing spread has reduced the value of feeding long enough for cattle to grade Choice. Thus, fewer Choice cattle. The Choice share will increase if the spread widens again.