Boxed Beef Pricing

WHAT IS IT AND HOW DO WE USE IT?

The Canadian Boxed Beef Report has been available on the CanFax website since October 6, 2003. The following information outlines what boxed beef pricing is and how it can be used as one of many marketing tools.

It is important to understand how boxed beef prices and cut-out values are derived. The beef carcass is fabricated into individual cuts which are grouped into primals, vacuum packaged, and then placed into cartons to be shipped as boxed beef. The cut-out value is derived from a formula that estimates the value of the carcass using a weighted average from these primals. The six primals, as illustrated in the chart include the hip, sirloin/loin, rib, chuck, brisket/shank, and flank/plate. These primals are broken down into the percentage weight they contribute to the carcass value. In general the hip, chuck, and loin are usually good indicators of beef movement. As well, the value of lean trim has an impact on all primal values.

The weekly Canadian Boxed Beef Report is structured to compare U.S. prices with Canadian prices. The U.S. Boxed Beef Cutout is broken down into weight and grade (light and heavy Choice or Select). Light refers to a carcass weight of 600-750 lbs and heavy refers to 750-900 lbs. For comparison reasons, the Canadian Boxed Beef Cutout is broken down into light and heavy AAA and AA. Light and heavy for Canadian purposes refer to a carcass weight on either side of 800 pounds. The difference between the U.S. and Canadian carcass weights reflects the difference in processing between the two countries. The report provides prices for products within each primal as well as lean trimmings. From these prices the overall cutout value is derived for both the AAA and AA grades.

Cutout values give an indication of consumer demand and industry supplies. When consumer demand decreases cutout values decline signaling packers to reduce supplies. Also when consumer demand increases, cutout values increase signaling packers to increase supply. Similarly when supplies increase cutout values will decrease in order to move more product or when supplies are tight cutout values will increase to reflect those tight supplies to the market and encourage increased production to meet demand. This situation moves down through the supply chain as packers reflect cutout values in the prices they are willing to pay for fed cattle, and consequently what feedlots are willing to pay cow/calf producers for calves. Hence, the cutout value is a good indicator on where the industry is moving with regards to prices.

Boxed Beef Pricing

SECTOR SPREADS

When analyzing cattle and beef prices there are three main price sector spreads within the industry to look at. The first one being farm gate to wholesale spread, second wholesale to retail spread, and thirdly farm gate to retail spread. The following discussion uses Alberta monthly fed dressed steer prices, monthly AAA cut-out values, and retail prices.

The farm-to-wholesale spread is the difference between the wholesale value (what the processor is selling to the retailer for) and the farm gate value (what the processor buys from the producer for). This difference reflects the cost of slaughter, fabrication, transportation, shrink, other costs, and a packer’s profit margin. From 1999-2003 the Alberta fed steer price made up an average 53% of the wholesale price. This ranged between 48-56%, which is typically thought to reflect a narrow margin, as both live cattle prices and the cutout value follow the same seasonality trend. Post BSE however, the Alberta fed steer price dropped to as low as 23% of the wholesale price, with the low end experienced during the lowest fed prices in July and August of 2003. This is thought to reflect wider margins available to packers. Fed cattle prices have since recovered and strengthened further with the opening of the US border to cattle under-thirty-months of age in July 2005. This resulted in the farm-to-wholesale spread slowly returning to a historical pattern.

The wholesale-to-retail spread is the difference between the retail price (what the retailer sells to consumers for) and the wholesale price (what the retailer buys product from processor for). This spread reflects the cost of retail trimming, boning, packaging, transportation, store overhead, shrink, cutting loss, other costs, and the retailer’s profit margin. From 1999-2003, the AAA cutout value represented 35-48% of the retail price, averaging 42%. During 2003 the cut-out value made up 28-41% of the retail price, with the margin in June and August ranging between 28-34%, as cutout values dropped while retail prices stayed firm. Cutout values as a percent of retail beef prices have continued to decline with 2007 averaging 31%. Cutout values dropped sharply the last quarter of 2007 as an appreciating exchange rate and large supplies of beef in the United States pressured cutout values down. As the cutout value represents a smaller percentage of retail beef prices there is a wider profit margin available to retailers which should provide incentive for them to feature beef and increase sales.

The farm-to-retail spread is the difference between the retail price and the farm gate price. This difference represents the change in value due to all forms of trimming, boning, shrink, cutting loss, packaging, and transportation. From 1999-2003, the Alberta fed steer live price was 18-24% of the retail price. The Alberta fed steer only represented 7-18% in the second half of 2003 and was lowest during July and August. This spread has since stabilized in the 14-15% range, significantly below the 1999-2003 average of 22%. This indicates that while costs have increased for many sectors in the beef industry – notably feed and processing costs – that the margin available throughout the supply chain is smaller. This puts pressure on all sectors as they try to remain profitable in difficult times.

Boxed Beef Pricing

SEASONALITY TRENDS

When discussing boxed beef seasonality trends we are referring to movement of beef sales and what trends take place during the year. Overall we can distinguish trends based on the primal cuts. Generally during the summer months there is more demand for the middle cuts because people are more interested in barbequing steaks than putting a roast in the oven for a couple of hours. During the fall when children go back to school as well as after Christmas demand for chucks and hips for roasting increases because they are cheaper cuts and there is less grilling demand.

Within the primals there are also specific cuts that follow their own trends. From a foodservice standpoint, during late February to May there is lots of activity on strips, ribs, and sirloins as buyers secure their volumes for summer months. Around late August and early September there is push on ground products as quick service operators increase their burger features. As well, certain holidays can cause seasonality trends. Thanksgiving can bring an increase in demand for ribs and this demand usually continues on until January covering Christmas parties, New Year's, and special events. Tenderloins are also a hot item during this time.

Boxed Beef Pricing

EQUATING BOXED BEEF PRICES TO LIVE EQUIVALENT

The weekly Canadian Boxed Beef Report can be used as a marketing tool to work backwards and determine approximately what live fed cattle prices could be. However, producers should remember that it is not just this simple math that determines live prices. Supply and demand, not only domestically, but also within North America, is the key in determining the cutout value of any specific week. As well, because on average cattle are sold one week and slaughtered the next week, cutout values relate to the live prices of the week prior. Therefore, producers should use these types of calculations as a barometer in conjunction with current daily U.S. cutout values and trends.

The calculation for equating boxed beef prices into live prices is:

   • Packer revenue minus packer cost minus packer margin equals cattle cost.

The first step is to establish the packer revenue. Packer revenue (per head) is the amount of money derived from the beef and by-products. The value of the meat is where the weekly Canadian Boxed Beef Report comes into play. The first calculation needed is to determine the composite cutout value. This is done by taking the AAA cutout value multiplied by the percent of AAA's slaughtered that week, while the AA cutout value must be multiplied by the percent of AA's slaughtered that week. These two values added together equal the composite cutout value.

Example:

AAA Cutout value =$1.70/lb
AA Cutout value =$1.67/lb

% AAA =53.72%
% AA =46.28%

   • composite cutout=(AAA $* % AAA)+(AA $* % AA)
   • composite cutout=($1.70*0.5372)+($1.67*0.4628)
   • composite cutout=$1.6892/lb

The second calculation is to take this composite cutout value by the carcass weight to determine the value of the total meat. However, to accurately reflect this, a weighted carcass average should be used. Therefore, the percentage of steers as a total of fed slaughter and the percentage of heifers as a total of fed slaughter must be computed. These percentages are then taken against the weekly Canadian steer and heifer carcass weights and added together.

Example:

Steer Slaughter = 28,358, Steers as a % of fed slaughter =48.05%
Heifer Slaughter = 30,656, Heifers as a % of fed slaughter =51.95%
Average steer carcass weight =850 lbs
Average heifer carcass weight =801 lbs

   • weighted carcass = (% of steers*avg steer carcass weight)+(% of heifers*avg heifer carcass weight)
   • weighted carcass = (0.4805*850)+(0.5195*801)
   • weighted carcass = 824.5 lbs
   • value of meat = composite value*weighted carcass weight
   • value of beef = $1.6892*824.5
   • value of beef = $1392.75

The last calculation for packer revenue is by-products. They are calculated in $/head in the CanFax Report and can be added to the value of the meat. Therefore, in this example if the fed cattle by-products were $96.50/head, the total packer revenue would equal $1,489.25.

Continuing on with the calculation for equating boxed beef prices into live cattle equivalent, you will remember that:

   • Packer revenue minus packer cost minus packer margin equals cattle cost.

Packer cost is the amount of money it takes the packer to process the animal. This includes the kill cost, fabrication cost, SRM removal cost, disposal of some products, and rendering of some products. The George Morris Centre estimated that prior to BSE packer costs were averaging approximately $150/head. Post-BSE, the George Morris Centre now estimates the packer cost between $170-200/head. This increase is due to SRM removal and other compliances the packers now have to follow post BSE. For this example we will assume a packer cost of $200/head.

Packer margin is the amount of money per head the packers would net. For this example we will assume a packer margin of $20/head.

Example:

   • Packer revenue minus packer cost minus packer margin equals cattle cost
   • $1489.25 - $200 - $20 = cattle cost
   • $1269.25 = cattle cost
Cattle cost is the last calculation in equating boxed beef prices to live equivalent. To get a live price we must first assume a carcass yield. For this example we will use a yield of 60%. Therefore, the net packer revenue (packer revenue-packer cost-packer margin) can be divided by the average carcass weight (calculated above) and multiplied by a 60% yield.

Example:

   • $1269.25 = cattle cost • $1269.25/carcass weight*60% yield = live cost per pound per head
   • ($1269.25/824.5)*0.60 = $0.92/lb/head
   • $0.92/lb/head = live equivalent of the boxed beef price for that week.

This example suggests that given all the assumptions (cattle weight and yield, packer cost and margin), when the composite cut-out value is $1.6892/lb, the packer could pay about $92/cwt for the live steer.