Katy Doumit, graduate research assistant and Ted Schroeder, agricultural economist
Premiums and discounts for US fed cattle have evolved over time in response to changing consumer demand for beef. Cattle producers have benefitted from grid pricing by receiving elevated prices for higher quality beef. Consumers have benefitted from having exceptional beef quality they prefer. Grid pricing refers to valuing a lot of cattle based on carcass merit, including premiums or discounts for traits such as quality grade, yield grade, preferred weight, special branded programs, and more.
Premiums and discounts are economically important to producers who market cattle with grid pricing systems. Most cattle sold under a grid pricing system use a marketing agreement with packers, including a base price and a schedule of premiums or discounts applied to marketed cattle. Grid pricing results in much greater price variation across transactions than negotiated cash market purchases reflecting quality variation. Figure 1 summarizes weekly weighted average distributions of net dressed price variation for fed cattle purchased using formula compared to cash negotiated valuation methods over the last two years.
In a typical week, 80% of fed cattle purchased under cash negotiated price receive a net dressed price within $2/cwt ($4/cwt range) of the weighted average price. In contrast, 80% of formula priced cattle realize a net dressed price within $10/cwt ($20/cwt range) of the weighted average. This greater variation associated with formula net prices is a direct result of premiums and discounts paid for varied cattle quality and other attributes.
Since the early 1990s, the beef cattle sector has consistently finished cattle to heavier weights. Figure 2 depicts weighted average slaughter weights for live and dressed cattle from January 1992 to July 2023 where live and dressed weights have increased over 170 and 100 lbs per head, respectively.
Carcasses under 600 lbs and over 900 lbs often receive discounts. As cattle have been fed to finish at heavier weights, discounts packers apply to light-weight carcasses have widened relative to heavier carcasses. Five-Area region carcasses in the lightest weight range (400-500 lbs) have seen a $10/cwt wider discount from 2004 to 2023 with current average discounts around $37/cwt. Alternatively, Five-Area region carcasses in the heaviest weight range (>1,000 lbs) have contracted $9/cwt since 2004 with current discounts averaging $10/cwt. Gains in retail products produced from heavier carcasses enable greater profits for packers which transmit to producers through reduced discounts for heavier carcasses.
With the gradual transition to heavier carcasses, relaxed Yield Grade (YG) 4 and 5 discounts have occurred while premiums for YG 1 and 2 cattle have remained steady. YG 1 and 2 carcasses are currently seeing average premiums of $5/cwt and $2/cwt respectively. Discounts for YG 4 and 5 carcasses are averaging $10/cwt and $15/cwt respectively, both seeing over $7/cwt reduced discounts since 2004.
Improvement in fed cattle quality has increased with carcass weights. Figure 3 illustrates the percentage of steers and heifers on a national basis that have a quality grade of Choice and higher since 1998.
This chart compared to Figure 2 implies a strong positive correlation between higher marbling scores and heavier carcass weights. Over the past 20 years, producers have responded resoundingly to the increased use of marketing agreements by increasing the percentage of steers and heifers that grade Choice and higher from 55% in the early 2000’s to consistently over 80% today.
Premiums and discounts for Quality Grades experience strong seasonal trends. Premiums for Prime carcasses tend to be lowest in April, May, and June and highest in October. In contrast, discounts for Select and Standard carcasses peak in February and March and see lows in May and June and again in November and December. Prime carcass premiums have remained consistent over time, averaging $16/cwt from 2004-2023. Select carcasses vary more week-to-week than most other carcass premiums or discounts due to rapid market adjustments to Choice and Select prices relative to each other at wholesale and farm levels from changes in supply and demand. Select cattle have seen discounts increase $10.50 since 2004, currently averaging $19/cwt in 2023. Standard grade cattle have also realized increased discounts of $14/cwt since 2004 with a 2023 average discount of $32/cwt.
There are strong positive correlations between Five-Area premiums and discounts and boxed beef spreads. The Choice-Select spread is increasingly volatile in recent years for both grid and wholesale markets, seeing historically high discounts in June 2021, both over $30/cwt. Strong correlations demonstrate how closely linked grid quality premiums are to the wholesale market. Increasing carcass weights have a positive impact on improving fed cattle quality, widening the spread between premium and discounted cattle which correlates with both the fed cattle and boxed beef markets. Grid pricing sends strong downstream value signals back to producers to incentivize producing beef consumers prefer.
Premiums and discounts are also offered on a variety of other desirable traits such as Certified Angus Beef (CAB), All Natural Cattle, and Non-Hormone Treated Cattle (NHTC). Premiums for CAB, All Natural, and NHTC average $4/cwt, $30/cwt, and $20/cwt, respectively. As consumer preferences continue shifting towards these traits, it’s likely premiums will remain steady with the potential to increase.
Cattle and beef quality has seen dramatic improvement with increased use of grid pricing by incentivizing high-quality products. Producers manage cattle procurement and feeding strategies by utilizing grid pricing systems to effectively market their cattle and maximize profit. Having current information on how premiums and discounts are changing over time is essential for effective fed cattle marketing.
Producers who are considering entering into a marketing agreement should study the array of alternative grids available and match those with their own cattle procurement, production, and marketing strategies. For a grid system to improve profit, it’s essential producers find a grid to match the type of carcasses they can effectively produce. Producers are strongly advised to monitor how their grid premiums and discounts compare with other grids and the weighted average provided in USDA premium-discount reports.
The full paper, Fed Cattle and Beef Premiums and Discounts, is available online through AgManager.info.
