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The USDA determines this primarily based on marbling, but there are two factors they use to do this: quality grades for tenderness, juiciness, and flavor; and yield grades for the amount of usable lean meat on the carcass.
Prime beef is produced from young, well-fed beef cattle. It has abundant marbling (the amount of fat interspersed with lean meat), and is generally sold in restaurants and hotels. Prime roasts and steaks are excellent for dry-heat cooking such as broiling, roasting, or grilling.
Choice beef is high quality but has less marbling than Prime. Choice roasts and steaks from the loin and rib will be very tender, juicy, and flavorful and are suited for dry-heat cooking. Many of the less tender cuts can also be cooked with dry heat if not overcooked. Such cuts will be most tender if braised, roasted or simmered with a small amount of liquid in a tightly covered pan.