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News and analysis on the global poultry
and animal feed industries.
on May 16, 2007

Egg executives discuss top industry concerns

"The biggest problems facing the industry are price volatility and profit and loss cycles."

For Cal-Maine Foods president Dolph Baker, the No. 1 challenge facing the egg industry is the need for supply management during low demand periods to take some of the volatility and loss cycles out of the business. This is particularly important, he says, if per capita egg consumption is leveling off.

"We can do a better job," he says, "with molting and emptying houses."

Escalating Costs

He adds that "we've had only one profitable summer in the last 20 years."

That said, Baker, of Jackson, Miss., is optimistic that "with costs where they are, we'll do a better job with supply this summer. That doesn't mean shell egg producers will be making money this summer," he says, "but maybe our losses won't be as big."

Larry Seger, president of Wabash Valley Produce, Dubois, Ind., says the No. 1 challenge facing the industry is "how to deal with the escalating cost structure in the business from rising corn and other inputs that go into the price of feed." He notes that egg production costs have gone up 10 to 15 cents per dozen at retail or food service. "Will we lose demand? I don't think demand will ratchet down another 5%" with the cost of eggs going up, he says.

On summer economics for the industry, Seger does not rule out profitability in some months, even though Easter through Labor Day "is the worst time of the year." He says that prices did not crash post-Easter to the extent they usually do, because it appears the industry is doing a better job than typically with molting and other ways to keep supplies in check. In addition, Seger says he "doesn't see a lot of new construction going on."

Rob Harrington, chief operating officer and executive vice president of marketing for Golden Oval Eggs, Renville, Minn., says the industry faces two big challenges. The first "is to keep up with good humane animal practices," and the second is to deal with egg price volatility. Golden Oval, an egg products company, has seen prices as high as 70 to 80 cents and as low as 20 cents for liquid unpastuerized eggs over the past three years," Harrington says, "This is a very big challenge and we're not alone." The solution, he says, is to use risk management tools with customers "to help us even out the highs and the lows."

Echoing the theme, Bob Krouse, president of Midwest Poultry Services, Mentone, Ind., says, "the biggest problems facing the industry are price volatility and profit and loss cycles."

It's important for the industry to come up with ways to level out price volatility and if the industry doesn't, customers will come up with their own plans, Krouse says. One possible solution, he says, is for eggs to be priced based on the cost of productioncost/plus pricing, to replace the current "commodity" pricing approach that treats eggs like No. 2 yellow corn. Looking at this summer, Krouse looks for the losses "to be a little more than 2006," due largely to such high corn prices.

At the top of the list of one Southeast egg president, meanwhile, are efforts by "non-caged animal welfare advocates" and regional pricing issues.

Egg Demand Growth

Executives interviewed say they expect continued growth in specialty eggs and value-added egg products, but disagree on whether that will create new overall per capita demand, or rather cannibalize traditional egg and egg product sales.

Specialty eggs: organic, free range, and Eggland's Bestare growing at a double-digit rate at Cal-Maine "and are an important part of our bottom line," says Baker. "We have been in the cage-free business the past 15 years," he notes, "and it continues to grow."

Specialty eggs give the industry "a shot at increasing total growth," he says.

Seger, however, thinks specialty eggs will just cannibalize traditional egg sales. "The more we put on the shelf, the more we confuse consumers," he says. "Specialty eggs are a niche, but we have to be careful," Seger says. He also says that there is the possibility that several national restaurant chains will increase the use of eggs nationally, noting that "this type of thing will help us."

Harrington looks for shell eggs to be flat to up 1% over the next few years, while processed egg products will increase far more rapidly. He looks for processed products to increase 2% to 3% per year, while specialty productsnutritionally modified, low fat, low cholesterol and prepared meal conceptswill increase by 4% to 6% per year. While he largely sees a switch in consumption from shell egg to processed products at both the retail and food service levels, Harrington nonetheless thinks both categories of processed products will increase overall egg consumption slightly.

Krouse does not believe demand has hit a plateau, and says that "specialty eggs seem to increase overall egg sales." He also says that he believes egg demand is inelasticunrelated to price. "We've proven that. A 40-cent swing doesn't change demand at all."

Consolidation

Consolidation in the egg business will continue with market participants fewer and larger, executives say, although most do not believe the industry will ever get down to just the handful of players that the broiler industry has. "I hope we never look like those guys and I don't think we will," Krouse says. The reason why: the egg business does not require the level of investment that broilersas meat processors require, he and others say. "I don't think we'll get down to three or four producers," he adds.

Krouse says that the industry is now down to about 250 major producers and that will continue to change, "but for us to get to fewer than 10 there would have to be an economic advantage to doing so, and it's just not there in the egg business."

Neither does Seger see the industry becoming like broilers, and says that the industry is far too independent to get down to just one or two major national players.

One executive says, however, that there is no reason to believe the egg business structurally will not eventually look like broilers, and it could happen in as few as 10 years. Just look at the number of egg companies paying into the American Egg Board in 1980 versus 2000, he says.

Cal-Maine's Baker says that "there is no question we will continue to consolidate, but I have no idea if we will ever get to where the broiler industry is. If we do, it will take 15 to 20 years."

Golden Oval's Harrington says "yes, we will move in the direction of broilers, but it will take quite a bit of time."

Animal Welfare

Krouse, of Midwest Poultry Services, says he believes "it seems likely that some states will ban caged production," although it's unlikely that cage bans will become a national trend. "It's far too expensive and the benefits aren't there," he says. In Krouse's view, it will be left up to the consumer to choose cage-free eggs, but not legislated on a national scale.

"I sure hope states don't legislate cage-free production. We will be working hard to make sure that doesn't happen," says Baker, who also is the chairman of the board of the United Egg Producers, which is active in battling cage-free legislative efforts.

Harrington says it's too early to know how the cage-free issue will be resolved, but he notes that some of Golden Oval's biggest customers "are moving in that direction."

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