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on February 12, 2007

Egg Executives Optimistic on 2007

Industry executives are optimistic this will be a profitable year because companies are streamlining layer numbers to compensate for corn prices.

Following two years of red ink, most egg industry executives are optimistic that 2007 will be a profitable one. One key reason why: high corn prices due to strong ethanol demand that has encouraged companies to hold the line or cut layer numbers.

“The last three months have been profitable and there is no reason to think it will not continue,” says Larry Seger, president of Wabash Valley Produce, Dubois, Ind. He noted that in late January, the Urner Barry price in the Midwest was $1.21/dozen for shell eggs, within 15 cents of all-time highs. He estimated prices for the entire month would be close to $1.10 to $1.15, more than 30 cents higher than previous-year levels.

High grain prices have encouraged the industry to match egg supply with demand, he says. “People have to look long and hard at putting up a 2 million bird complex when they don’t know if corn prices are going to be $2.50 or $7/bu.,” Seger says.

Expansion: “Not Now”

“When I sit down with my brothers and look at expansion, we say no, not now, and it’s due to ethanol,” Seger says. “The macro picture we’re having to look at is what the national energy policy is going to be,” he says. He notes that there are 100-some odd ethanol plants in existence with more being planned that will take anywhere between 2 billion to 5 billion bushels of corn. The big question, he says, is whether the nation continues with its drive to energy self-sufficiency, regardless of what happens to crude oil prices. “We’re having to make decisions we’ve never had to make before and I’ve been here 35 years.”

No one wants to pay $4/bu. for corn, but, ironically, “we always do better with high-priced corn,” says Marcus Rust, an owner of Rose Acre Farms, Seymour, Ind. “Bankers don’t want $4 corn fed to chickens,” he says.

Current corn prices in the $4/bu. range add about 8 cents per dozen per day over 2005 and most of 2006 costs, and high feed costs “always lead to more profitable egg prices,” says Gene Gregory, the new president of United Egg Producers, Atlanta. It seems like it should be both the opposite, he says, “but with lower grain prices, producers hold their hens to an older age. When feed prices are high, people get rid of hens sooner.” In addition, he adds, echoing the views of egg company executives, “high grain prices slow down expansion.”

One action Seger and some others say they will do in response to the almost unprecedented run-up in feed prices is to use forward pricing tools to do more hedging.

More Than Exports

Even though two large export orders have been made by United States Egg Marketers, of which Seger is the chairman, he says it’s incorrect to credit those orders as being largely responsible for the recent increase in egg prices.

While the second order that occurred in January was substantial, 60,000 cases per week, they were equal to only 1.5% of U.S. production over the four-week period that they occurred. “The exports were important, but other things were happening. We (the nation) were producing fewer eggs,” he says. Layers have been sold off, and “retail sales have been good.”

It isn’t clear just how high-priced grain will affect egg sales, Rust says. Eggs are one of the cheapest protein sources, so $4/bu. corn could possibly help egg sales overall, he says, but it’s possible that specialty eggs sales will be affected. With high-priced feed driving up all protein sources, some consumers could opt for regular instead of specialty eggs due to their cheaper price, he notes.

Not all egg producers are optimistic on 2007, however. David Thompson, president of Pearl Valley Eggs, Pearl City, Ill., acknowledges that while there is “some temporary profitability, I am not optimistic it will continue because of feed prices and too many eggs produced.”

Thompson adds that high-priced corn is encouraging producers to investigate other feedstuffs. “It may very well alter what the birds are fed,” Thompson says, noting that bakery byproducts, wheat midds, distillers dried grains, cereal fines, and other ingredients are among feedstuffs being considered.

“Cautiously Optimistic”

Mark Oldenkamp, vice president of northwest operations for Valley Fresh Foods, Woodburn, Ore., says that he is “cautiously optimistic that we can stay at profitable levels.” He notes that egg prices have shot up substantially, but the post-Easter period “is the real question.” In total, he looks for a profitable 2007, but probably not during summer months. That said, he notes that ethanol-driven feed prices are up 10 cents per dozen, and “ethanol appears here to stay.” One opportunity for egg producers is to make use of futures options when they can lock in favorable feed prices. He says that in the West, bakery and corn screenings, wheat, and canola already are being used, “but we need to explore options more than before” with basic ingredients so high-priced.

Agreeing with other egg executives, he says that “when feed prices are high, we make more money, as producers are more inclined to keep supply and demand in balance.” Oldenkamp adds that for those who have made the move, specialty eggs are less sensitive to swings in feed prices than traditional eggs are. His firm produces Eggland’s Best and some brown eggs.

Reduced Flock Size

Bill Rehm, president of Daybreak Foods, Lake Mills, Wis., notes that there has been a fairly significant reduction in the nation’s flock size—286 million birds projected for 2007 versus 290 million in 2006. “We are profitable now, but whether the reduction keeps prices higher remains to be seen,” he says.

Rehm adds that there is a significant increase in demand for liquid eggs. The key reason why, he says, is the “huge discrepancy” in prices for table eggs versus breakers. In late January, table eggs were priced at $1.27, while eggs sold for breakers were not even half that, 51 cents. As a result, “anyone with the ability to put eggs into a carton was doing so,” he says.

The widening of the price differential, he says, is due to the United Egg Producer’s animal welfare program that most shell egg producers participate in.

Agreeing with others that $4 corn is more likely to keep supply and demand of eggs in tighter balance, he says “we will face red ink faster when the market drops and that should get producers to match supply with demand so we don’t lose so darn much money all the time.”

Rehm says the only exception to egg prices not increasing when feed prices did was 1988. He adds that his company’s hedging strategy hasn’t changed, it’s just that the price levels have. Rehm continues that there are no great, cheap feed buys out there, because everything rises based on the price of corn. Even distillers’ dried grains, a byproduct of corn ethanol production, have been increasing along with corn prices, he notes.

Impact on Demand

Will substantially higher egg prices hurt consumer demand? Rehm and most others interviewed for this report don’t think so. “I tend to think that consumers will buy eggs whether the price per dozen is 70 cents or $1.70,” Rehm says. He adds that eggs are like milk, products with inelastic demand, that is, unrelated to price. It’s different with T-bone steaks, he says.“When consumers see high prices on T-bones, they say, ‘maybe I’ll do something different tonight.’” Gregory agrees: “Whether eggs are 39 cents or $1.25 per dozen, consumer purchases are the same.”

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