Building premiums, cut by cut | TheFencePost.com
Miranda reiman, Certified Angus BEEF

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Building premiums, cut by cut

Something doesn't add up.

In 2016, U.S. packers saw Choice beef production increase by 8.1 percent while that of the Select grade held steady. Yet the value of Choice over Select (the Choice-Select spread) went up by $3.47 per hundredweight (/cwt.).

"If you're just looking at supplies, you'd assume the premiums for hitting those higher quality endpoints would go down," said Mark McCully, vice president of production for the Certified Angus Beef brand. "But that's where the story of demand really shines."

The Choice-Select example pales compared to the growing CAB premium. After 10 years of record volume sales leading to more than a billion pounds last year, the CAB-Choice spread was up $5.77/cwt. to average a record-wide $14.44/cwt. advantage last calendar year.

"Many think most of the brand's value comes from steaks and the high-end, five-star steakhouses," McCully said. "They're an important part of our business, but we see end-meat users starting to add even more dollars back to the carcass."

In 2010, Urner Barry market data showed a 7 percent CAB premium over Choice ribs and a 6 percent CAB value advantage over Choice loins. That's compared to a 2 percent CAB premium over both the Choice chuck and round. By 2016, the CAB brand premiums for those middle-meat primals were 6 percent and 11 percent above Choice, respectively — but the end meats' contribution nearly tripled. The CAB value advantage over Choice had grown to 6 percent for the chuck and 5 percent for the round.

Simply put, it's not all about the steaks.

Overall, high beef prices led to more end-meat features at retail, and might have inspired consumers to change up their menus, said Gary Morrison, market reporter with Urner Barry.

"You go to the food store and you see a package of chicken sitting there and it's $10. You can feed your family with that and the package of two steaks might be $40 or $50. What are you going to do?" the analyst asked. "People seemed to find these alternate cuts and the industry has done a good job promoting them. That's driving the demand of end meats."

END MEATS

It's not simply a matter of trading down to less-expensive cuts, however. End meats grew in popularity largely because an increasing share of them were of premium quality and carried less risk of disappointment.

Mark Polzer, CAB vice president of business development, said the chicken industry may have figured it out first, but beef is taking full advantage now: adding value cut-by-cut improves profitability on the entire carcass.

"They took an item like chicken wings, which was a 'giveaway' item — and now it commands huge money because it's featured on so many menus," he explained.

Many beef marketers are finding similar opportunities with formerly "underutilized" cuts.

"They're pulling the teres major and flat iron out of the chuck and they've created real value," Polzer said, noting those can fetch double the price of a bone-in chuck roll. "So you're pulling $4 to $5 items out of a $2.50 item. That helps the value of the chuck significantly."

Higher beef quality grades nationwide have opened doors.

"The average inside round or chuck roll is going to be more highly marbled than it was 20 years ago," Polzer said. "That doesn't mean you'd cut a slab of inside round and put it on the grill and have it be the eating experience of a steak, but it is significantly better and lends itself to more uses."

Morrison said when beef buyers are experimenting with new cuts, they will choose a brand or quality-level they trust.

"I think they know, 'Hey, buy the quality, and you're going to taste the difference,'" he said.

HIGHER VALUE

Maybe that helps explain the tripling of the CAB value premium over Choice chucks since 2010.

"The good news is that this is additive," McCully said. "It's not that traditional cuts like a filet mignon or ribeye are bringing less — even they are commanding a higher premium — but the quality bonus on things like short ribs and briskets is increasing even faster."

Dining trends, such as an increase in Tex-Mex fare and premium burgers, are supportive, Polzer said.

"Fifteen years ago, everybody thought of ground beef as a commodity item, but it's been our fastest growing segment the last five years," he said.

Export trade to countries like Japan adds up, too.

"One of their favorite items to merchandize is the chuck that they slice very thinly, and they also do a good job on the short plates and thin meats as well," Polzer said.

Value-added processors, who often use end meats to create pre-cooked beef options for both retail and foodservice customers, find that starting with high-quality beef is one less variable they have to worry about, he said. Sales of CAB value-added products increased 8.9 percent last year.

"This continues to drive the message back to the producer: quality pays," Polzer said.

Turns out the numbers add up, and the dollars do, too. ❖