What Does the Choice-Select Spread Mean to You?

John F. Grimes, OSU Extension Beef Coordinator

The current beef quality grading system was established by the United States Department of Agriculture in 1923 as a means to differentiate value in carcasses. The grades of Prime, Choice, Select and others have established themselves in today’s market and are assigned specific dollar values. The vast majority of cattle graded in this system will grade either Choice or Select.

Today, marketing of fed-cattle is evolving towards value-based systems or grids. Currently, more than 60% of fed cattle are sold in a system where pricing is based on carcass quality grades. The difference between the Choice and Select boxed-beef cutout (primal cut values assembled into a composite number) is referred to as the Choice-Select spread. This is a major factor in determining the prices paid to producers.

As most are aware, nearly all aspects of the beef industry are experiencing record-high prices for all categories of cattle. For much of the fall, live market cattle have sold in the vicinity of $120/cwt or higher. Since mid-summer, the Choice-Select spread has steadily climbed to a current daily levels ranging from $15-20/cwt for boxed beef. Many factors have led to this increase in the Choice-Select spread including unique current feedlot demographics resulting from drought-related placements, high feed costs that limit days on feed, strong export sales, and increased purchases of higher quality beef by the world’s largest retailer Wal-Mart. Data provided by Certified Angus Beef stated that from 2002-2009, the average yearly Choice-Select spread ranged from a low of $4.70/cwt to a high of $13.49/cwt with an average of $8.21/cwt.

So what do these numbers mean for the owners of fed cattle? Using data from fed cattle processed through U.S. Premium Beef Co. in Kansas from earlier in 2011, cattle with the ability to achieve Choice grade or higher received significant premiums in markets where the Choice-Select spread was much lower than current levels. In data from one owner’s cattle that were processed during times where the Choice-Select spread ranged from $2.65/cwt to $9.26/cwt earlier this year, owners received premiums of $36.25 to $130.49 per head. Current premiums for Choice cattle would obviously be much higher than these figures from early 2011.

These numbers are impressive for the owners of fed cattle but what does it mean for the cow-calf producer? If you are a cow-calf producer that chose to retain ownership until harvest and sold the animals on some type of value-based system or grid, that decision is currently a very profitable one. However, I believe a minority of cow-calf producers implement retained ownership as a routine management practice. The vast majority of cow-calf producers must believe this practice is not consistently profitable or are unwilling to tie up their assets for an extended period of time to expose their operation to further price risk. Conservative marketers probably believe in the old adage that “A bird in the hand is worth two in the bush!” Current feeder calf prices probably strengthen that belief!

The purpose of this article is not to persuade all cow-calf producers to start retaining ownership on their entire calf crop. Yes, there are significant potential profits out there for cattle producers willing to try this management technique. However, achieving these profits does not happen easily or overnight because there are many factors involved. You obviously have to produce a calf that is able to perform in the feedlot and on the rail so identify the genetics that are capable of doing both and discriminate against genetically inferior breeding stock. A sound health program must be implemented on the farm to prevent future animal sickness that can obviously impact profitability. The producer must identify the proper feedlot situation that can efficiently feed the animals and ultimately assist them with marketing through the most advantageous value- added system. Retaining ownership is not easy but it can be rewarding.

Does the current Choice-Select spread mean you should change the genetic priorities for your herd? It is a complicated question with few easy answers. Regardless of your marketing system, I would say the highest genetic priority should be placed on reproduction. It is challenging to make a profit in the cattle business in any year but profits are impossible if the cow doesn’t get bred and deliver a live calf every year. Calving ease and fertility traits should always be emphasized.

Producers who solely market feeder calves will always value weaning weight but must not ignore post-weaning performance. Post-weaning growth and carcass traits are going to be important to the person who eventually finishes and markets your calves. I have often heard producers lament that they are not rewarded for cattle that can excel in the feedlot and on the rail. While that may have been true in the past, that situation is changing rather quickly. Technology is allowing feedlot operators to better monitor animal performance in the feedlot and more easily gather carcass data. They are also better able to determine the source of their feeder cattle. These feedlot operators are “keeping score” and have long memories!

I believe the current Choice-Select spread is an excellent example of unique marketing opportunities that are available to today’s producer. The same production principles that will allow one to capture carcass premiums today can apply to any program that is willing to pay the producer a premium for a specific market need. Carcass premiums cannot be consistently achieved without the use of superior genetics. Markets for age and source verified calves are not possible without a dedication to an animal identification and recordkeeping system. Extra dollars are available to those willing to background calves and utilize a wide variety of health protocols that can prepare calves for markets ranging from traditional to antibiotic- and/or hormone-free.

While current feeder calf prices are historically strong, expenses are very high as well. Regardless of the economic climate at any given time, producers can rarely if ever afford not pursuing price premiums for their calf crop. Today, the Choice-Select spread is an obvious example of premiums above normal market prices that are available for cattle that meet a specific market demand. It is true that these premiums can fluctuate significantly based on market situations but they are nearly always available to some degree. The same can be said for other premium programs. Unfortunately, the producer cannot achieve the premiums that may be available in the market unless a disciplined, long-range management plan is in place. Don’t let the opportunity pass you by.