| Written July, 2002 |  |
File B2-60 |
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Understanding Cattle Price Spreads
Chuck Lambert, Economist for National Cattlemen's Beef Association
Summary
In light of recent discussions about widening packer and retailer spreads (NCBA) has received several requests for a simplified explanation of USDA live to cutout to retail price spreads, also often called “packer margins” and “retail margins.” USDA calculates and publishes these price spreads on a monthly basis using USDA reported prices for fed cattle, boxed beef and retail beef, USDA’s published by-product value and standard average carcass and retail yields. The following is an attempt to explain how USDA arrives at these price spreads.
Background
- Every 1,000 pounds of fed cattle live weight will yield 630 pounds of carcass weight and 427 pounds of salable retail weight beef based on industry average yields used by USDA.
- If fed cattle prices are $.65/lb. the feeder will receive 1,000 lbs. X $.65 or $650.00/head. This “producer spread” actually is gross receipts and says nothing about how much if any “profit’ the feeder made because the price of corn and feeder cattle and other costs of production are not included, but it will serve as the basis for calculating the producer’s share of retail value. Even though the gross receipts were $650/head the average breakeven price for cattle based on prices paid for feeder cattle and corn prices is currently $67/cwt. This means that with this example in current market conditions the NET receipts for producers is a minus $20/head. It is important that producers consider costs and net receipts rather than focusing on gross receipts when talking about the price spread for any given sector.
- If the USDA light weight Choice boxed beef cutout value is $1.15/lb., the packer will receive 630 lbs. X $1.15 or $724.50 from the sale of boxed beef. Plus, the packer will also receive the value for the sale of the hide and variety meats. If USDA’s calculated by-product value for a 1,000 pound steer is $90.00, the packer will also receive that. So, the packer receives $724.50 + $90 or a total of $814.50. BUT, remember the packer paid $650 for the animal in the first place so the packer spread is calculated at $164.50 /head ($814.50 – $650). Again, this “packer spread” is actually gross receipts and says nothing about how much if any “profit’ the packer made because the packer’s costs are not included, but it will serve as the basis for calculating the packer’s share of retail value. Even though the gross receipts were $164.50/head the average cost for slaughter and processing each fed cattle is estimated at $130.00/head. This means that with this example in current market conditions the NET receipts for packers is $34.50/head. Again, it is important that producers consider costs and net receipts rather than focusing on gross receipts when talking about the price spread for any given sector.
- If the USDA Choice retail beef price is reported at $3.30/lb., the retailer will receive 427 lbs. X $3.30 or $1,409.10/head. BUT, remember the retailer paid for $724.50 for the boxed beef in the first place so the retail spread is calculated at $684.60/head ($1409.10 - $724.50). Again, this “retailer spread” is actually gross receipts and says nothing about how much if any “profit’ the retailer made because the retailer’s costs are not included, but it will serve as the basis for calculating the retailer’s share of retail value.
- In addition to calculating the actual dollar spreads for each sector, USDA also presents all sectors’ receipts as a percent of retail value. The value of by-products is included in the aggregate retail value for this calculation so the aggregate retail value used for calculating percentage of retail would be what the retailers’ receive $1409.10 plus the by product value of $90 or $1499.10. In this example the producer’s share of retail value would be 650/1499.10 or about 43.4 percent. The packer’s share of retail value would be 164.50/1499.10 or about 11.0 percent. And the retailer’s share of retail value would be 684.6/1499.10 or about 45.7 percent.
Based on the above methods used to calculate sector spreads the annual average USDA producer, packer and retailer spreads from 1984 through 2001 are shown below. The average producer’s share of retail value has declined from 62.2 percent in 1984 to 47 percent in 2001. The average packer’s share of retail value was 5.1 percent in 1984, reached a low of 4.7 percent in 1992 and increased to 9.5 percent in 2001. The average retailer’s share of retail value has increased from 32.7 percent in 1984 to 43.6 percent in 1998 and was 43.5 percent in 2001. Again, these percentages only reflect average percent of gross value and do not account for costs at any sector or reflect net profit margins.
Key Points
Using the above formulas and actual data for May 2002 we get the following spreads per 1,000 pounds of fed cattle live weight and percentages of the retail value of beef. Producer spread -- $658.40/head and 43.4 percent of the retail value of beef. Packer spread -- $159.97/head and 10.6 percent of retail value. And retail spread – $697.28/head and 46.0 percent of retail value.
One of the criticisms of the USDA price spreads is that only Choice boxed beef and the USDA Choice retail price is used in the calculation. Another issue often raised is that retail price specials or “feature” prices are not taken into account. USDA data show that during April 2002, 61.5 percent of all cattle graded were USDA Choice or Prime and 38.5 percent graded USDA Select. The light weight USDA Choice boxed beef cutout for May 2002 was $1.1536/lb. and the light weight USDA Select boxed beef cutout was $1.0671/lb. These prices and percentages can be used to calculate a weighted average boxed beef cutout price of 1.1203/lb. The USDA all-fresh beef retail price for May 2002 was 3.105/lb. and Cattle-Fax data show that the USDA retail price adjusted for featuring is generally close to the USDA all-fresh beef retail price.
Using these actual adjusted data (weighted average boxed beef price and the all-fresh retail beef price) for May 2002 we get the following spreads per 1,000 pounds of fed cattle live weight and percentages of the retail value of beef. Producer spread -- $658.40/head and 46.5 percent of the retail value of beef. Packer spread -- $137.39/head and 9.7 percent of retail value. And retail spread – $620.05/head and 43.8 percent of retail value.
Regardless of which price series are used, other analysis shows that the trends towards decreasing producer shares of the retail value of beef and increasing packer and retailer shares would still prevail. However, the magnitude of the change in spreads would be smaller. No matter which price series is used, gross margins have little meaning unless information is also available about the cost structure for each sector and NET receipts are available for comparison.