Supply management: the key to profits
The importance of production efficiency versus supply management
Even though the single greatest influence on egg price and profits is egg supply, little effort has been devoted to controlling supply versus improving production efficiency. The reason is the organizational management required for effective supply management is complex. However, with enhanced industry consolidation and higher feed cost creating longer down turns and larger swings in egg prices, the industry may be entering a new ballgame. This fact, along with new tools becoming available to assist in controlling egg supply should encourage more emphasis on supply management.
This article discusses the importance of production efficiency versus supply management and describes new technology (Econometric Feeding and Production Control) available to help improve both.
Supply Management Tools
Controlling hens and molting: The objective of supply management is to prevent over supply of eggs, which can significantly reduce egg prices. It is estimated that hundreds of millions of dollars have been lost and will continue to be lost unless better methods of supply management become available. To help prevent over supply, the United Egg Producers has promoted reducing hen numbers by emptying houses early, delaying refilling, and reducing cage density. Molting has also been promoted as a supply management tool, but this tool is more effective in matching demand with supply within a company.
In the past, many producers have not participated in supply management because they knew egg prices could increase before houses could be refilled or hens would peak in production after molt. Because fixed costs are high and demand for eggs is not constant, it is obvious that controlling hen numbers and molting cannot adequately control supply. If new supply management tools were available that would allow producers to maintain hen numbers, optimize returns and at the same time assist in regulating supply, more producers might be willing to participate.
Econometric feeding: Econometric feeding allows producers to continually feed for optimal profits as conditions change. This automatically assists in supply management. For example, under some feed and egg price conditions, returns are optimized by feeding less protein or by allowing hens to consume less protein and energy (environmental control) than required for optimal performance. The savings in feed cost is greater than the loss in egg value and increased fixed cost. Production and egg size are reduced but feed efficiency may or may not be depending upon the econometric method used. Econometric feeding allows producers to know which protein level and energy intake optimizes performance and which level or intake optimizes returns. In most instances, the protein level required for optimal performance and profits is the same, but in some instances, especially with low egg prices, they are not.
All producers, large and small, would benefit from econometric feeding since returns are optimized and it helps control egg supply regardless of what other producers do. It makes no sense when losing money to continue optimizing production when the reason for losing money in the first place is excess eggs. This is especially true when producers can reduce supply and losses at the same time by econometric feeding.
Production Control: To enable the production control features of the econometric feeding and management program, producers would need to optimize performance on a protein level that will not be immediately economical. For example, when egg supply cannot be reduced by econometric feeding and producers determine as a group they have excess eggs, they could optimize performance on a protein and/or energy intake level that gives slightly lower production. They do this even though short-term losses in cents per dozen increase and would benefit later, but only if enough producers participated.
Requirements for Econometric Feeding
Econometric feeding requires knowing and/or using much more accurate and detailed nutrient requirements than typical feeding programs provide. For example, feeding for maximum production only requires that producers know what protein level gives maximum performance. With econometric feeding, producers also have to know the response of hens fed graded protein levels above and below the level required for optimal performance.
Because the protein level required for optimal returns varies depending on energy intake (temperature), energy versus protein cost, difference in egg price due to size and absolute egg and feed prices, an econometric feeding and management program is required to determine the correct protein level. The dietary protein level required for optimal performance also varies with energy intake, but is not influenced by feed or egg prices. Producers vary protein levels as feed intake varies by feeding based on intake. With econometric feeding, protein levels fed vary based on feed intake and on egg and feed prices.
A new method of feeding called econometric feeding and management (EF&M) has been developed which allows the integration of econometrics and environmental control into nutritional programs. It does this by recalculating protein and energy requirements as feed intake and feed and egg prices change. This not only allows producers to optimize returns up to 2 cents per dozen, but also gives producers two other tools to help control egg supply.
System Has 5 Components
The EF&M Program has five components (feed formulation, traditional feeding program, record keeping, econometric feeding, and production control) integrated into a single program. To run the program, the producer simply enters current feed ingredient and egg prices. All diets are then reformulated with a printout showing returns (cents per dozen) for each diet. Based on the returns shown, the producer can select the diet for optimal returns and/or performance as desired.
Producers have always known egg and feed prices control profits. However, those two factors have traditionally not been correctly used in feeding for two reasons. First, adequate response data to protein levels above and below the requirement were not known and second, software programs required for least-cost nutrient requirement calculations as prices change were not available.
With econometric and production control feeding, only diets that influence production up to an average of about 3 percent or egg weight up to 1.5 g are used. The exact variation in egg production and egg weight due to protein and energy level is dependent upon hen age. No protein level used in econometric feeding is low enough to initiate molt and as a result the hen's response to increasing or decreasing protein is immediate.
In many cases, when hens are fed poorly balanced diets or nutrients have been accidentally left out, some hens may molt or be severely affected and as a result, production never returns to normal. When hens are restricted from feed or fed diets extremely low in protein and molted, they peak at a higher rate of production but typically it takes eight weeks to reach 50 percent production. In many cases, this may be longer than desired for supply management, especially when molt windows are short.
Requirements for Production Control
Seasonal demand for eggs and a philosophy of always feeding for maximum performance ensure continuation of the excess egg and low egg price cycles, which can reap havoc on the industry. Since those cycles have always occurred, it may be easy for producers to think that nothing can be done and nothing will be unless producers become more willing to think out of the box and work together. Until producers, especially marketing and production managers, fully acknowledge that supply and production efficiency control profits and are willing to place more emphasis on production control, the egg industry will continue to experience erratic market swings. A strong United Egg Producers (UEP) and the industry's willingness to explore change are also important elements in successful implementing production control strategy.
When producers go beyond econometric feeding to control supply that is referred to as production control. This is a completely new concept to many producers. In the past, the entire industry has been geared toward production efficiency, and bonuses are typically based on achieving production standards. However, it doesn't matter how well hens are fed and managed, producers will lose with low egg prices.
Trying to reduce losses an extra penny (although important) by optimizing efficiencywhen profits could be 20 cents with better supply managementis definitely not the answer. In some instances, increasing losses less than a penny per dozen can reduce production up to 3 percent, which is a huge amount of production control. In other instances, producers could even reduce losses while reducing egg supply (econometric feeding).
With the econometric feeding and management program, producers can know the increased cost associated with production control. That knowledge, along with knowledge that reducing egg supply could quickly take returns from red to black, should encourage greater voluntary participation in supply management.
First Step in Production Control
The first step in initiating production control is providing producers a tool that would allow them to feed econometrically. There are no reasons producers should not feed econometrically, because it optimizes returns regardless of what other producers do and at the same time it helps control egg supply.
The EF&M program gives much more flexibility and accuracy in feeding than existing programs because it allows feeding for optimal performance and/or optimal returns as conditions dictate. It also allows feeding for production control when industry is ready.
It is believed only a few of the largest table egg producers using the EF&M program could have a huge effect on supply management. Early 2007, an export order obtained by U.S. Egg Marketers of 246,000 cases (less than about one-third day's egg supply) helped increase egg prices up to 50 cents or more. That reduction could be obtained by producers reducing egg production 3 percent for only 10 days or producers representing one half of hens reducing production 3 percent for 20 days.
The EF&M program also has a built in feed formulation and record keeping program which allows performance and nutrient intakes to be validated, summarized, charted and graphed with standards in a way not possible with most programs. This allows management control, nutrient requirement and production efficiency tuning not previously possible. Having all programs combined into a single program and available online is also a significant time saver.
The availability of econometric feeding and production control programs along with hen reduction and molting should allow producers much more control over supply management and profits. Although changing a century of feeding for maximum performance will be difficult and not without some learning pains, the potential gain in profits (literally billions of dollars) for even slight improvements in supply management is too much for the industry to continue ignoring.