Summer Wholesale Beef Values Weaken

By James Robb, Director and

Erica Rosa, Agricultural Economist

Livestock Marketing Information Center

In late April, Choice boxed beef cutout values peaked at slightly more than $162 per cwt. Since then, boxed beef values have seasonally declined during the summer months and will likely remain soft until fall. But so far this year, Choice and Select wholesale beef prices have remained stronger than the prior five-year average (1999-2003).

Beef packer margins were under severe pressure last fall. At times during this winter and spring, packer margins were squeezed again. Compared to 2004, packer margins this summer and fall will likely return to normal levels.

Wholesale beef cut prices are reported by the USDA/ Agricultural Marketing Service and then aggregated into boxed beef cutout values. The boxed beef cutout is an accumulation of the individual meat cut prices designed to depict an average carcass-related price at the wholesale level. Currently USDA calculates cutout values for three baseline carcass equivalents:

• Choice (600-900 pounds);

• Select (600-900 pounds);

• Cutter cow.

Choice

Based on underlying supply and demand conditions, these three wholesale beef values can be quite different, especially on a seasonal basis.

Choice boxed beef value peaked in the first quarter of 2005.  The Choice (600-900 pounds carcass equivalent) boxed beef value on a weekly basis averaged slightly less than $148 per cwt., 9 percent more than the same time last year. Second-quarter Choice boxed beef values averaged nearly $151.52 per cwt., less than last year’s value  of $153.44 but still about $27 per cwt. better than the prior five-year average.

This year, wholesale beef values improved in late April and early May. The Choice boxed beef value peaked in late April at just more than $162 per cwt. Last year, the boxed beef value peaked at the beginning of April, which is slightly earlier than normal.

However, by mid-May the wholesale beef values started to erode fairly drastically. The weekly average Choice (600-900 pounds carcass equivalent) boxed beef value in May was $156.82 per cwt. Although this value compares favorably to last year’s $155.77 per cwt., Choice boxed beef values in June declined even further. The June monthly average value of $140 per cwt. was nearly $8 per cwt. less than the average in June 2004.

Summer

Seasonally, summer wholesale beef prices soften in response to beef supply and retail market demand conditions. However, the decline was more pronounced than normal this year. From May to June, the monthly Choice boxed beef value decline nearly 11 percent, compared to last year when the monthly decline was only 5 percent. As of July, Choice boxed beef values were in the mid-$130s when values were still in the mid- to low-$140 range last July.

Select and Cutter-cow Values Somewhat Stronger

Select values are paralleling the decline in Choice wholesale values. Weekly second quarter Select (600-900 pounds carcass equivalent) boxed beef values averaged $141.75 per cwt. or about 4 percent more than last year ($136.40 per cwt.). However, by May wholesale prices for Select beef eroded to $134.67 per cwt., about $4 per cwt. less than Select values in May 2004.

On a monthly basis, Select boxed beef values did not decline as drastically as Choice boxed beef values, falling only 5 percent. The smaller May-to-June decline in Select beef values relative to Choice beef values was due to a growing supply of quality-graded Choice beef relative to quality-graded Select beef (i.e. heavier weight cattle) and continuing demand for lean cuts to help fill-in for very low supplies of cow beef.

Cutters

This year, the cutter-cow cutout has supported extremely strong, and at times record-high, U.S. cull-cow prices. In May and June, the weekly cow cutout averaged more than $120 per cwt., which was 9 percent and 6 percent more than a year ago, respectively. The cutter-cow cutout peaked in mid-May at $124.09 per cwt. and then weakened into June. Despite some weakness in values, the cutout was still in the low-$120s by early July.

Packer Margins

The live to cutout price spread is the difference between the purchase price of a slaughter steer and the wholesale value (Choice boxed beef cutout) value plus the total value of the byproduct items from the steer. This price spread is often referred to as the estimated packer gross margin. Importantly, the live-to-cutout spread does not represent beef packer profitability because it does not consider a processor’s operating costs.

The live-to-cutout spread is extremely seasonal in nature due to seasonal changes in beef supply and demand. Typically, the spread widens during the first six months of the year, peaks in April or May and then narrows during the remainder of the year. Last year, the live-to-cutout spread peaked a little earlier at $229.71 per head in April. Last year was not a normal year though, so yearly comparisons may seem exaggerated.

This year, the live-to-cutout spread gradually widened during the first quarter and early second quarter, peaking in May at $188.27 per head. Compared to 2004, the live-to-cutout spread in May was about $16 per head less, but it was 14 percent greater than the prior five-year average. By June, the live-to-cutout spread had narrowed to $136.19 per head or about $2 per head less than a year ago. Compared to the prior five-year average, the live-to-cutout spread was nearly $40 per head less. However, the five-year average spread actually peaks in June whereas this year, the peak occurred in May.

Packer margins were squeezed at times this spring and summer due to strong slaughter cattle prices and lower-than-anticipated wholesale beef prices. However, the packer margin is expected to improve this summer and fall as slaughter-cattle prices weaken.

The recent reopening of the U.S. border to live-cattle imports from Canada should also improve packer margins. The stability of consumer beef demand and U.S. beef export market developments are the remaining questions entering the remaining summer and fall months.