Quality and yield grade premiums are attractive

2011-10-24T13:06:00Z Quality and yield grade premiums are attractiveBy A. DiCostanzo, University of Minnesota Beef Team Minnesota Farm Guide

Quality and yield grades achieved by finishing cattle respond to a combination of factors including genetic background and its interaction with diet, health, environment and management factors such as days on feed.

Because factors other than genetic background respond broadly to environment (i.e., health response to climate) and economic factors (i.e., decisions on grain content and days on feed respond to feed prices), volatile market years and weather events have extreme influence on quality and yield grades.

Due to current conditions responding to the economic recession that began in 2008, demand for Choice or better quality-grading beef has slipped.  This condition is further intensified by higher grain and fuel prices, leading to direct and indirect impacts on quality and yield grades of fed cattle.

From 2008 to 2010, the percentages of Choice- and Prime-grading cattle have increased from 63 percent to 68 percent.  Corn grain prices in 2008 averaged $4.97/bu, while corn prices in 2009 and 2010 averaged $3.53 and $3.96/bu, respectively.

Percentages of Choice- and Prime-grading cattle appear to have responded to corn grain prices appropriately. Because feed cost of gain increases with increasing days on feed, cattle feeders managed their cattle inventories within the constraints of high grain prices; cattle were marketed to a lower degree of finish during high grain price years.

Interestingly, during that same time period, cattle reaching USDA Yield Grade (YG) 1 and 2 increased from 45 percent to almost 53 percent. Typically, YG increases (i.e., cattle become fatter) with increasing proportion of carcasses reaching Choice and Prime.

Therefore, cattle harvested in the U.S. since 2008 have improved both in quality and YG. This improvement in YG may actually be a direct result of genetic improvements that result in carcasses reaching sufficient marbling with low fat cover to achieve Choice or better quality grade.

Carcasses (under 1,000 lb with ribeye area from 10 to 16 in2) from black cattle not showing dairy background reaching sufficient marbling of fine texture to grade in the upper 2/3 Choice grade, and under “A” maturity are considered to qualify for Certified Angus Beef premium in most packing plants in the U.S.

Since 2008, premiums for CAB carcasses have decreased from $3.11 to $2.60/cwt carcass. This is understandable as demand for higher quality beef has slipped. During this same time frame, the Choice-Select spread decreased from an average annual spread of $5.92 to $5.05/cwt carcass in 2009.

Interestingly, in 2010, the Choice Select spread increased back to $6.02, and, currently, the Choice-Select spread has increased from a negative $0.36/cwt carcass in late February to the current spread at over $14/cwt carcass. At the time of the lowest Choice-Select spread in February, 71 percent of carcasses reached Choice and Prime grades. Currently, only 63 percent of carcasses are grading Choice and Prime.

On the other hand, average premiums for YG 1 and 2 carcasses have increased from $2.13/cwt carcass in 2008 to a high of $2.50/cwt carcass earlier this year. Current average premiums for YG 1 and 2 carcasses are $2.06/cwt. The current premium for CAB is at $2.44/cwt carcass.

Considering that CAB acceptance rates for carcasses range from 15 percent to 23 percent of Choice grade, and proportion of carcasses reaching YG 1 and 2 carcasses is almost double this value, feedlot operators and, even cow-calf producers, must focus on maintaining sufficient leanness in carcasses, particularly during economically challenging years.

Applying CAB acceptance rates of 24 percent to Choice-grading carcasses (lb) accounted for in the 2010 USDA grading report, and using the 2010 average CAB premium ($2.60/cwt carcass) the overall premiums received in 2010 for CAB carcasses would have totaled $60 million dollars.

In contrast, applying average premiums for carcasses reaching YG 1 and 2 in 2010 ($2.30/cwt carcass) to the total yield (lb) of carcasses grading YG 1 and 2, including Select carcasses, totaled $147 million dollars in premiums.

Alternatively, because of grid structures in certain packing plants do not compensate for YG 1 or 2 carcasses when they do not reach Choice grade, eliminating yield of these carcasses from the 2010 calculations would still reflect a total of $87 million dollars in premiums for YG 1 and 2 carcasses in Prime and Choice categories; still 45 percent greater than premiums received for CAB carcasses.

Although it is expected that, as the Choice-Select spread improves as economic conditions improve, incentives for producing lean cattle exist in the form of YG 1 and 2 premiums.

As long as premiums for carcasses reaching YG 1 and 2 are similar to those for CAB or other programs accepting carcasses in the upper 2/3 of Choice, feedlot operators and cow-calf producers must not neglect breeding, feeding and management objectives that enhance leanness in their programs.

In a climate of increasing concern and oversight from regulatory agencies and consumers in support of environmentally sustainable production practices, it makes sense to consider genetics, feeding and management strategies that yield lean beef cattle production of high eating quality.

Copyright 2016 Minnesota Farm Guide. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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