2008: Lower prices than ’07, but still a good year
The record prices of 2007 are likely to spur investment in facilities and producers may wish to increase their houses to full capacity.
Next year is likely to be another profitable year for egg producers, though not quite as profitable as 2007. The big reason why: the all-time record prices of 2007 are likely to spur investment in new facilities and producers will have the incentive to increase their houses to full capacity.
In his annual outlook completed in late October, Don Bell, poultry specialist emeritus at the University of California-Riverside, forecasts the average Urner Barry large Midwest egg price for 2008 to be $1.04/dozen, 11 cents below his estimated price for where 2007 will end up: $1.15. His forecast for 2008 would still be 29 cents per dozen higher than 2006's 75 cents per dozen, and 35 cents higher than 2005 levels. In other words, 2008 is likely to be another good year for egg producers.
Bell says that profits in 2007 have been the highest in recorded history. For example, Midwest profits in September were 50 cents per dozen, or 90 cents per bird, and in Bell's view, "you'll likely never come up with anything like that again." He calls profits of those levels "fantasy land, and we're about to leave fantasy land."
In contrast with this year's 2 percent reduction in the flock size, Bell looks for a 1.8 percent increase in the flock size in 2008, and he says that "a downward curve in price with increasing production is what everyone expects." Bell's forecast calls for bird numbers the end of 2008 to total 294.1 compared to 287.6 the end of this year. He adds that more birds, plus a hatch that is up, equals a lower price. In making price estimates for 2008, Bell used history as a guide, but excluded 2007 because it was such an exceptional year. In his view, producers will likely get houses "as full as they can," even though "with fewer birds the industry would make more money."
All this said, Bell notes that making estimates for 2008 is very difficult because 2007 has been such an extraordinary year. He adds that production changes account for only 25 percent of price changes, so many factors will end up influencing prices in 2008.
No Expansion Yet
There is no indication that producers are expanding yet, however. USDA's latest Chicken and Eggs report showed that egg-type layers as of Oct. 1 were 2 percent lower than the same period in 2006.
Looking at the top 10 states in table egg layers in flocks 30,000 and above, only two, Iowa and California, showed an increase in layers comparing September 2007 versus the same month in 2008. Iowa was up 2 percent; Ohio, down 7 percent; Indiana, down 1 percent; Pennsylvania, down 4 percent; California, up 1 percent; Texas, down 1 percent; Nebraska, down 8 percent; Florida, down 1 percent; Minnesota, down 5 percent; and Georgia, down 2 percent.
The department's Economic Research Service predicts egg production to be 1.7 percent higher in 2008 from this year's levels. Production this year will be 1 percent lower than 2006, USDA forecasts.
On price, USDA forecasts next year's average to be 89 to 97 cents per dozen, New York, down from $1.03 to $1.05 this year, 71.8 cents in 2006, 65.5 cents in 2005, and 82.2 cents in 2005. Looking at the first half of 2008, USDA forecasts prices to range between 95 cents and $1.03, New York, per dozen, in the first quarter, and 83 to 89 cents in the second quarter.
On demand, the department forecasts commercial disappearance to be up 1 percent in 2008 from this year's levels, but down 2.4 percent this year from 2006 levels, and lower than 2004 and 2005 as well.
It's hard to look forward to 2008 without examining what caused 2007 prices to be so strong.
Concerns for 2008
Gene Gregory, president and CEO of United Egg Producers, Atlanta, says that while he expects 2007 to be a very strong, profitable year, he "has some concerns" about the first six months of 2008. One reason why, he says, is the increase in pullets hatched that may start coming into producer flocks.That said, there did not seem to be a rapid buildup as of late October.
Reasons contributing to the 2007 record-high egg prices and high producer profits, he says, include:
- The ethanol boom that pushed feed prices to high levels
- The impact of UEP's animal welfare program on flock numbers
- The summer's heat, which reduced production and reduced egg size
- The inventory of dried eggs, down considerably compared to 2006 levels
- A substantial increase in exports
Craig Williardson, president and CEO of Mo-Ark, LLC, Chesterfield, Mo., says that discipline, balance, steady demand, and of course, the normal cyclical factors following a very poor market period starting in mid-2004, have all played a role in 2007 looking so positive.
The industry has been able to better manage its production and it inventories; trades of surplus product are finding the right market homes, he says.
Customer demand has been surprisingly steady in spite of the high prices. It helps that all proteins and dairy products are commanding higher prices from consumers at the same time. Williardson states, "Increasing worldwide demand has made a difference in our outlook. Unbridled expansion has not been the norm this year with the uncertainty over animal welfare issues and hopefully, some long memories of the response in 2004.
"With hen numbers projected to stay even through the fourth quarter (compared to 2006), profitability should continue for the rest of 2007 and into the first quarter of 2008. After that point, I believe we will be under pressure to evaluate our production/demand balance againand volatile grain markets will be part of that evaluation."
Larry Seger, president of Wabash Valley Produce, Dubois, Ind., says that a combination of events has caused the industry to be down 1.5 percent to 2 percent on the supply side. The biggest impact, he says, is from the "sharp spike up in grain prices that has kept the industry on edge." Other factors, he says, include the egg products side of the business being very good and we've used up any dried inventory we had in 2005 and 2006."
Agreeing with Gregory, Seger, chairman of United States Egg Marketers, notes that the industry "exported more shell eggs and egg products."
Seger says that he expects egg production to increase, but not a "wholesale run" like what occurred in the 1980s and 1990s. The industry has become more responsible on the production side, and, he says, the animal welfare guidelines will keep production from increasing substantially. All this has been occurring, he says, "with demand that is as strong as it's ever been."
Supply Will Increase Slightly
As a result of such record prices, he adds, "our supply will increase ever so slightly as we head into 2008." Seger also says the opportunity is there to export more eggs partly due to high grain prices. It might be better for countries to import the finished product than feed, he says. In particular, Europe and the Middle East offer export opportunities.
All interviewed for this article, including Paul Sauder, president of R.W. Sauder, Lititz, Pa., say that while not a major factor, the uncertainty that producers face regarding the battle over animal welfare rules; that is, whether cages will or will not be allowed in the futureis a factor keeping expansion lighter than normal during the run of high egg prices.
In Sauder's view, "2008 will be good (on prices and profits), I just don't know if as good as 2007."
Mark Oldenkamp, vice president of Northwest Operations for Valley Fresh Foods, Woodburn, Ore., says the potential is there for 2008 "to be a very good year, providing we don't get carried away. Our history is to lack the discipline (to over expand during times of high prices), but I think the industry is learning how not to overproduce."