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Strong by-product values lift cattle prices
By-product values supported cattle prices throughout 2021. That strength seems likely to persist into 2022.
The aggregate value of by-products is referred to as the drop value, or drop credit, and often simply the drop. The drop reflects the wholesale value that packers receive from the animal’s by-products that “drop” off the carcass when an animal is harvested for beef. Those items include hides, edible offal, and inedible offal. Variety meats are a subcategory of edible offal.
USDA Market News Service releases a weekly report on cow by-product values (NW_LS444). A steer by-product report (NW_LS441) is released daily. USDA’s Weekly National Carlot Meat Report consolidates several reports, including the cow and steer by-product reports. Values are reported on a dollars per live hundredweight (cwt) basis. A dressed equivalent basis is also reported with 47% being assumed for cows and 63% for steers. Furthermore, the report notes that a typical slaughter steer weighs 1,400 pounds and slaughter cow weighs 1,100 pounds so a drop value per head can be calculated. Cattle weights have changed over time, so any dollar per head figure is best used for contemporary comparisons.
Highest drop values since 2014
Drop values for both steers and cows trended higher in 2021 (Figure 1). For the week ending December 3, the steer by-product value was $14.61 per live cwt, up 72% ($6.11) from the same week in 2020 and 42% ($4.32) above the 2015-2019 average. At $14.46 per live cwt, the early December cow by-product value was up 46% ($4.54) compared to a year earlier and 60% ($5.44) higher than the five-year average. The last time drop values reached similar levels was in 2014.
Interestingly the cow by-product value averaged greater, on a dollar per live or dressed weight basis, than the steer by-product value in 2021. This occasionally happened in the past, but not this prolonged and to this degree. This does not mean steer by-products were worth less, but rather cow by-products were worth more.
Drop values gain on meat
In mid-2020 drop values began building in relative value to their respective live cattle prices (Figure 2). For instance, in October 2021 the steer drop value was 13.1% of the 5-Area weighted average live negotiated steer price for all quality grades. It’s been above 12% since August 2021 and above 10% since May 2021.
Looking at the monthly percentage back to January 1990, the lowest was 6.2% in May of 2020, during the peak of COVID-19 market disruptions. The highest since 1990 was 14.6% in January 1997.
A simple regression model suggests that a 10% increase in the steer drop value results in a 3.6% hike in fed cattle prices, all else being equal. Higher carcass cutout values also boost fed cattle prices whereas slaughter levels are negatively correlated with cattle prices.
Big differences among by-products
Observing prices for separate items provides insight into the value of by-products for US packers and renderers. Year-over-year strength in the steer drop value has been mostly attributable to tripe (up 48% to up 473% depending on the product), livers (up 267%), tongues (up 143%), oxtail (up 112%), edible tallow (up 108%), and inedible tallow (up 85%) along with several other items included in the by-product total. These include cheek meat, head meat, hearts, and lips. Edible tallow is largely exported for cooking in other countries. Inedible tallow is used mostly for industrial purposes like biodiesel. The largest component of steer by-product value is the hide. But steer hide values are only even with a year ago after showing strength during the spring and summer.
The sharp jump in cow by-product value is due to hikes in inedible tallow (up 124%) and tongues (up 83%). The growing biofuels market is boosting demand for key feedstocks with vegetable oils and fats seeing some of the sharpest inflation of all agricultural commodities. The price rally for these raw ingredients is seemingly showing no signals of slowing in the near-term.
The majority of by-product items depend on foreign markets. Many internal organs, like the liver, have more robust demand by foreign consumers than they do by the US population. Beef variety meats alone account for more than 20% of the volume of US beef muscle cut and variety meat exports and over 10% of the value.
Help limit consumer sticker shock
Consumers think retail beef is plenty pricy. But retail beef prices are actually lower than they would be without by-product sales because the processing costs to wholesalers of the entire animal are spread across both muscle cuts and by-products.
Efficiency gains from technological advances have lowered the costs to recover by-products, enabling packers and renderers to sell more by-products at potentially lower prices. It is true that, technologies now exist for producing synthetic materials that could replace, or compete against, by-products. But supply chain challenges for raw materials and new, or growing demand, for some by-products have been supportive.
Estimates of by-product production are not readily available. Cattle produce by-products in nearly fixed proportions. However, availability and production do not necessarily equate. By-products collected from cattle can vary from animal to animal, packer to packer, and over time. Packers seek to capture the highest possible profit from every possible piece of the animals that they process; ribeyes, ground beef, a steer hide, and a beef liver all contribute to profits.
Processor headaches vary
Packing plant operational capacity is highly influenced by the supply of labor. The COVID-19 pandemic, plus measures to recover from it, exacerbated longstanding labor shortages in processing plants. Labor shortages have both upstream and downstream effects. Even if plants have enough labor to operate harvest floors, many are short of labor on boning lines and in by-product capture operations. Bottlenecks may divert some by-products to the rendering plant that would have higher values in other forms.
Many smaller processors have sufficient access to rendering services and can earn some by-product revenue, primarily for hides. But for many others "the drop" is a liability rather than a revenue source. Some may not collect enough volume each week to offset what the renderer charges to pick it up. Others may be located in an area with limited access to rendering. In 2020, 65% of the federally-inspected cattle plants slaughtered between 1-999 head annually and 22% slaughtered between 1,000-9,999 head annually. This equates to roughly an average of 8 head and 45 head per week, respectively, assuming 51 slaughter weeks per year.
Furthermore, small, fee-for-service processors, i.e., custom-exempt plants, sell processing services, not muscle cuts and by-products. They cannot cover their processing costs with drop revenue, because the drop either generates little or no revenue, or is a cost.
Lee Schulz, extension livestock specialist, 515-294-3356, firstname.lastname@example.org