A Few Thoughts by John Nalivka: Market premiums
August 24, 2017
Will the premiums that cattlemen have realized over the last three or four years continue as the herd grows and beef production expands? I have been asked this question repeatedly this year in conversations about branded and / or niche programs in the industry. The topic definitely deserves consideration by everyone in the industry, particularly producers. Let's talk premiums.
There are two sides to the question of market premiums. I think the most important aspect is the question of demand for a product that commands a premium. Secondly, the topic of premiums wouldn't enter the picture unless there was insufficient supply to meet that demand. There are several examples of this demand – supply imbalance in the last few years. The demand for age and source verified cattle as a requirement to rebuild U.S. beef export markets following the discovery of BSE was notable. The supply of cattle that could meet that criteria were, for the most part, non-existent. To build the supply, there had to be an economic incentive – how much will I be paid – a valid question. Age and source verification programs were an important beginning for the industry with regard to premiums. As new niche programs for grass fed, organic, natural, and others were created to meet growing U.S. consumer demand, premiums became fairly well established, even in the midst of record prices driven by tight supplies for all beef and cattle.
USDA's recent (August 21) report indicates the carcass premium paid by packers for "All Natural" ranging from $24-$28 / cwt. while "NHTC" (non hormone treated cattle) premiums range from $16-$20 / cwt. and "CAB" (Certified Angus Beef) $3-$4 / cwt. In contrast, a year ago, the "All Natural" premium ranged from $25-$32, "NHTC" at $13-$25, and CAB was $3-$6 / cwt. In addition to the actual premium, carcass weights also play a role in the total premium value paid and this year, carcass weights, while steadily increasing as the summer progresses, have been well under a year ago.
The top end of premiums is already down from the prior year as shown in the above report and the market is definitely under pressure as cattle supplies and beef production increase. Beef production will continue to increase into 2018 and 2019 as herd expansion continues. The question of premiums largely rests with the willingness and ability of consumers to pay a premium for niche beef products. On the supply side of the equation, will producers continue to expand the supply of these niche products? Once again, it rests with the premium. While the industry has seen many changes over the last five years, ranchers still want to be paid for that extra investment – it's just matter of how much the market will bear. Premiums are declining, but the real question is much of a decline cattlemen being willing to accept.