Relative Importance of Weight, Quality Grade, and Yield Grade as Drivers of Beef Carcass Value in Two Grid-Pricing Systems

Professional Animal Scientist, Feb 2006 by Tatum, J D, Belk, K E, Field, T G, Scanga, J A, Smith, G C

Abstract

This study examined the relative importance of carcass weight, quality grade, and yield grade for establishing beef carcass value in 2 grid-pricing systems without the influence of large discounts for nonconformance. A data set consisting of carcass records for 2,000 cattle was constructed to closely approximate carcass weight and grade characteristics of the U.S. fed cattle population. Two beef carcass-pricing grids-a quality-based grid and a yield-based grid, simulating actual commercial beef-pricing systems-were used for the analysis. Grid prices were computed for individual carcasses at each of 3 Choice-Select spreads ($5.00, $10.00, and $20.00/45.4 kg), and stepwise multiple regression was used to compare the relative importance of weight, quality grade, and yield grade for determining carcass value in both pricing systems. For both grids, carcass weight was the single most important driver of carcass value per head, accounting for 70 to 90% of the variation in total revenue per head when the Choice-Select spread was ≤$10. As the Choice-Select spread increased, the importance of weight as a value-driver decreased, and the importance of carcass quality grade performance increased. Quality grade was the second most important driver of grid value, accounting for about 8 to 9 times more variation in revenue per head than yield grade when the Choice-Select spread was $20. Yield grade played a minor role in both pricing systems, accounting for

Key words: beef, carcass, pricing, grades, marketing

Introduction

Numbers of grain-finished steers and heifers marketed by U.S. cattle feeders using value-based pricing grids have increased steadily during the past several years. According to a survey of cattle feeders in 4 major feeding states (Schroeder et al., 2002), the percentage of cattle priced using grids increased from 16% in 1996 to 45% in 2001 and was expected to continue growing to approximately 62% by 2006. Survey respondents indicated that their primary motives for increased use of grid pricing were to obtain premiums associated with superior carcass quality and yield grade (YG) performance and to gain access to carcass data (Schroeder et al., 2002).

Beef carcass pricing grids typically include very large price discounts for carcasses that do not conform to mainstream beef marketing specifications. Nonconforming carcasses (usually described as "outs") include carcasses produced by bullocks, stags, and heiferettes, as well as carcasses with a dark muscle color (i.e., dark cutters), advanced maturity characteristics (i.e., hard bones), yellow fat, or weights that are too heavy or too light. The necessity of avoiding "out" discounts when selling cattle on a pricing grid is well documented (Doherty et al., 1999). Correspondingly, commercial cattle feeders who routinely sell cattle using pricing grids have become proficient at minimizing the production of "outs." The objective of this analysis was to determine the relative importance of weight, quality grade, and YG for establishing beef carcass value using 2 different grid-pricing systems, once the predominant influence of large price discounts for nonconformance has been eliminated.

Materials and Methods

Data Set. Calculation of accurate estimates of grid-price signals, associated with differences in carcass grade performance, required compilation of a data set that closely approximated the actual distributions of USDA quality grades and YG in the U.S. population of fed cattle. Population estimates for beef carcass grade distributions were derived using data obtained from the National Summary of Meats Graded, reported annually by the Meat Grading and Certification Branch, AMS-USDA (USDA, 2004a). Cumulative frequencies for quality grades and YG assigned by USDA graders over a period of 5 yr (calendar years 1999 through 2003) and the number of carcass records used to represent each quality grade × YG subset in the analysis are presented in Table 1.

Individual carcass records for 2,000 market cattle (1,215 steers and 785 heifers) sold on pricing grids between 1998 and 2004 were selected to represent the quality grade × YG frequency distributions in Table 1 and were compiled into a single data set for subsequent analyses. The focus of this analysis was to estimate market signals associated with differences in carcass weight, quality grade, and YG without including the "noise" associated with discounts for nonconforming carcasses. To accomplish this, carcass records were excluded if hot weight was 453 kg, if the overall maturity of the carcass was Bmaturity or older, or if other defects were noted (e.g., dark lean color, yellow fat, etc.). In addition, carcasses produced by "dairy-type" cattle, which are heavily discounted in some pricing systems, were excluded. The resulting data set consisted of records for A-maturity, beef-type carcasses, ranging in weight from 252 to 452 kg, with USDA quality grades ranging from Prime to Standard, and YG ranging from 1 to 5. It was recognized that carcasses with a quality grade of Standard or YG of 4 or 5 might be considered "outs" by some. However, accurate estimation of price signals associated with differences in carcass grade performance required inclusion of the appropriate frequencies of carcasses representing the full range of quality grades (Prime through Standard) and YG (1 through 5) that normally would be applied to carcasses produced by fed steers and heifers marketed using beef pricing grids. Proportions of steers and heifers represented in the data set (60.8% steers; 39.2% heifers) were identical to percentages of steers and heifers reported in the National Summary of Meats Graded for the calendar year of 2003 (USDA, 2004a). Mean carcass weights for cattle included in the data set were 359 kg for steers and 339 kg for heifers.