Next week we expect that the majority of factories will be quoting 326-328p/kg for U-3 grade prime cattle.
However, recent reported prices would indicate that factories have been prepared to pay significantly more for cattle than base quotes.
This article will provide a comparison between quotes and reported prices in recent weeks and will help provide some clarity on prices that are currently available in the market for beef finishers.
Any analysis of prices quoted and actual prices paid by plants is complicated by the fact that it is not a like-for-like comparison.
Factories provide base quotes each week which are an indication of what they will pay for finished cattle.
These quotes are based on the U-3 grade and exclude bonuses and penalties.
Quotes for other grades can be calculated from this base quote using the cattle pricing grid agreed between factory and producer representatives back in late 2010. This is outlined in Table 1 below.
EU legislation means that factories are obliged to report the actual prices they paid for cattle in the previous week.
These actual prices are published in this Bulletin each week, however, unlike base quotes, these reported prices are inclusive of all bonuses and penalties which makes comparison slightly more complicated.
In addition to the base quotes an 8p/kg in spec bonus is available for cattle that kill out within specification.
Significant bonuses are available for Aberdeen Angus cattle (8-36p/kg) and Hereford cattle (8-20p/kg) dependent upon the grade and scheme operating at individual factories.
Deductions are also in place for cattle that are overage, overweight and for non-FQAS cattle.
A summary of the bonuses and deductions currently in place are outlined in Tables 2,3 and 4.
The combination of these factors affect the final price paid to the producer and when we undertake any comparison this must be considered.
Due to the extra bonuses available for Hereford and Aberdeen Angus prime cattle these have been removed for the sake of this analysis. In the overall average price these account for about 1p/kg of a difference.
Last week the seven major plants were quoting a base price of 324-326p/kg for U-3 grade steers.
The average price paid for 113 U-3 steers last week was 336p/kg.
This price includes those cattle that qualified for the 8p/kg bonus and those that did not.
This average price paid was 10p/kg above top steer quote of 326p/kg last week.
This price paid indicates that all steers killed and price reported in NI last week qualified for the 8p/kg bonus and that none received any deductions for killing outside specification.
Even if you make these unrealistic assumptions the paid prices are still 2p/kg above the base prices quoted.
This is an indicator that much stronger prices have been paid.
The difference between the prices quoted and the prices paid is slightly more pronounced if we look at the price paid for U-3 grade heifers. Base quotes from the plants for heifers last week were 326- 328p/kg and the average paid price was 339p/kg.
If we assume that all heifers were paid at the top base quote of 328p/kg, that all heifers qualified for the 8p/kg bonus and that no heifers received any deductions then there is still a differential of 3p/kg between prices quoted and prices paid.
Once again this clearly shows that stronger prices are available that the base quotes suggest. Similar differences in the prices quoted and the prices paid can also be observed if we look at R grading cattle last week.
Using the grid in Table 1 and a base quote of 328p/kg an R=3 grading heifer should be quoted at most at 324p/kg.
The average price paid for the 86 R=3 heifers killed last week was 335p/kg, 11p/kg more than the base quotes would suggest. R=3 heifers qualify for the 8p/kg bonus if they meet all the other spec criteria.
Again if we assume that this is the case for all cattle within this grade the reported price is still at least 3p/kg higher than quotes.
The difference between quotes and prices could be explained in two ways.
One explanation is that the average price of 339p/kg for U-3 grade heifers is broadly representative of the prices paid to all producers.
This would imply that all producers are receiving the 8p/kg bonus and more besides.
A more realistic explanation is that while some producers are being paid at the base prices quoted by the factories, some are receiving much more. Indeed LMC analysed the spread of prices paid for cattle in Bulletin issue 2208.
This analysis clearly showed that a wide range of prices were available, with the top third of cattle attracting as much as 15-20p/kg more than the base quotes in early March 2012.
Meanwhile quotes were found to be more in line with the prices paid for the bottom third of cattle.
It is likely that the wide range in prices is explained not only by the difference in price paid for in and out of spec cattle, but also on the ability of producers to negotiate the best price.
Producers who have a good relationship with the processors due to a history of producing sufficient numbers of high quality cattle to the right spec are in a strong position to negotiate better prices.
This is particularly relevant when cattle numbers are tight. Prime cattle slaughterings for the week ending the 23/06/2012 were 6,214 head, 3.5 per cent lower than the kill in the same week last year.
The total prime cattle kill for the year to date stands at 157,686, almost 12 per cent down on the same period last year.
With supplies remaining tight producers continue to have leverage in the market and with this in mind we would advise producers to take the base quotes as being subject to further negotiation.
Meat Trade News Daily Supporting British Pig Farmers
Source: Argentine Beef Packers S.A.
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