On January 1, 2015, all shell eggs for sale in California are required to come from hens that were maintained in an environment that meets Proposition 2 standards. One thing that everyone can agree upon is that it will require more space per bird to meet Proposition 2 requirements, but there is still not a consensus on how many hens will be housed in California come January 1, 2015. National layer flock numbers have increased through 2013, but record levels of egg exports have helped offset a potential domestic oversupply situation. Throw in a dramatic drop in feed costs resulting from the 2013 U.S. grain harvest along with all of these other factors, and 2014 has the potential for lots of surprises.
Corn price forecast
The November United States Department of Agriculture (USDA) World Agriculture Supply and Demand Estimates (WASDE) report projects that the farm price for corn will be between $4.10-4.90 per bushel for the 2013-2014 crop year. The midpoint of this estimate, $4.50 per bushel, is $2.39 per bushel less than the USDA reports for the average farm corn price for the 2012-2013 year.
Dr. Thomas Elam, economist, FarmEcon.com, said that his corn price model forecast a farm price of $4.60 per bushel based off the November WASDE report. "I think the USDA range for corn is spot on," Elam said.
Dr. Paul Aho, economist, Poultry Perspective, said, "We have come down from $7.00 per bushel for corn to $4.50 per bushel. I agree with USDA that we should be sailing along in the $4.00 per bushel range for a few years. We had three years in a row of record corn prices, but we have finally fixed this. We have a bear market in corn."
When asked about the impact of a drought in 2014 on corn prices, Aho said, "There is a 17 percent chance of a drought each year, but a drought in 2014 would only temporarily halt the direction of the market, which is down.
Soybeans not as clear
The November USDA WASDE report estimates that the farm price for soybeans will be between $11.15-13.15 per bushel for the 2013-2014 crop year. The midpoint of this estimate is $12.15 per bushel, which is $2.25 per bushel less than the USDA reports for the average farm soybean price for 2012-2013 crop year.
Elam said, "I have never come up with a good soybean model, so my projection is based on experience. South America has a record crop in the works. If that crop comes to pass, prices will be on the lower end of the USDA range."
The last harvests in North and South America were not enough to turn the soybean meal markets around, according to Aho. Soybean meal futures were still high in December. Aho said, "It is going to take another good harvest in South America to slay this dragon." He said that he had hoped that the U.S. 2012-2013 harvest would be enough to get soybean meal back to $350 per ton, but it looks like it will take another year.
Impact on layer feed costs
The Egg Industry Center (EIC) provides monthly estimates for production and feed costs for the U.S. layer industry as well as profitability estimates. The standard feed formula used by EIC for layer rations is 67 percent corn and 22 percent soybean meal. If we assume that basis and freight charges remain unchanged and we assumed that soybean meal prices will fall at the same rate that soybean prices are projected to fall, then the midpoint of the USDA WASDE corn and soybean price estimates can be used to estimate feed costs changes from the 2012-2013 crop year to the 2013-2014 crop year.
The estimated drop in the corn price should save egg producers a little over $57.00 per ton in layer feed costs in the 2013-2014 crop year when compared to what they would have paid in 2012-2013 based on the USDA's reported average farm price for corn. The estimated drop in the soybean price from the 2012-2013 crop year to the 2013-2014 crop year should save egg producers approximately $18 per ton. The combined impact of the projected lower corn and soybean prices could save egg producers approximately $75 per ton in feed costs or approximately $0.114 per dozen eggs.
Aho said that right now we have relatively more expensive protein (soybean meal) and relatively cheaper energy (corn). This relationship should encourage egg producers to reduce total crude protein levels in rations and utilize more crystalline amino acids to meet the birds' requirements for essential amino acids. Egg producers might also consider inclusion of more distillers dried grains with solubles (DDGS) as a lower cost protein source.
Economic growth
There seems to be a common theme in economic projections that have appeared in the popular press that gross domestic product (GDP) growth in the U.S. will rise to an annual rate over 3 percent in 2014. But, many of the economists cited also point out that they made the same GDP predictions for 2012 and 2013, when growth remained well under 3 percent.
Elam said, "Three percent is likely too high; 2.5 percent is more likely. Nonetheless we are growing, and it is good news for demand. Combined with lower feed costs, profitability will be much improved until we get the inevitable increase in broiler, turkey and egg production. Broilers are already growing, and prices weakening. Turkey production will start to grow in early 2014 as the new Farbest plant comes on line. The best business conditions will be early next year. The back half will depend greatly on the state of U.S. crops next summer."
Exports not as strong in 2014
U.S. poultry and egg exports reached new record highs in 2014. Because of shortages in Mexico brought on by avian influenza problems, shell egg and egg product exports to Mexico from the U.S. set new records for both volume and value. Both Elam and Aho said that they expect U.S. poultry and egg exports to be somewhat reduced in 2014 from 2013 levels. We can expect prices to decline as production in the U.S. has already begun to ramp up in response to increased profitability brought on by lower grain prices.
Other factors
Aho said that he had one prediction for 2014 that he felt very comfortable making: "2014 will be an interesting year with lots of surprises." One "surprise" for the industry to be mindful of is the recent avian influenza cases in Hong Kong, according to Aho.
The strain of avian influenza virus isolated in the infection of a woman in Hong Kong is not the same strain as has been isolated in the outbreaks on the mainland over the last few years. Past avian influenza outbreaks have had negative impacts on poultry consumption in China. The success, or lack of it, of avian influenza eradication efforts in Mexico could also play a big role in the profitability of the U.S. egg industry in 2014.
Elam said, "Summer growing conditions, Federal Reserve monetary policy shifts, the upcoming debt ceiling and federal spending debates, and global economic conditions will all play a major role in how 2014 plays out. Most of the surprises are likely to downside risks. However, another summer like 2013 will allow us to build some formidable grain stocks and push feed costs even lower. One very positive development is going to be reduced corn price volatility. The current 1.8 billion bushel forecast corn carryover is a sea change from where we have been. Higher corn stocks will help keep a lid on prices for the next 18 months. Also, stopping the growth of ethanol production via a lower Renewable Fuel Standard is also a huge positive change going forward."
