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on January 2, 2007

Escalating fuel costs don’t hurt Midwest feed advantage

Since fresh eggs and further processed egg products must be transported great distances, the fuel cost hike is particularly burdensome on egg producers in Iowa and Minnesota.

Diesel fuel that costs 60% more than two years ago and 20% more than just a year ago has hit the Midwest egg industry hard. Producers are affected by skyrocketing transportation costs wherever they are located, of course. But since both fresh eggs and further processed egg products must be transported great distances from the Midwest to major markets, the fuel cost hike is particularly burdensome on the major egg producing states of Iowa and Minnesota.

“We’ve been able to recover some, but not 100%” of the additional costs, says Travis Lubitz, logistics manager for Golden Oval Eggs, Renville, Minn. Yet while transportation costs are up considerably, he says fuel is still “a minor cost, but increasing. It has made an impact on our bottom line, something we’re starting to watch more closely.”

Wayne Carlson, vice president of logistics for Sparboe Companies, Litchfield, Minn., says that “all things being equal, higher fuel costs mean that Iowa and Minnesota lose some of their historical advantage,” because producers have to pay more to get egg products to distant markets. He says higher transportation costs are a double whammy for the Midwest because egg firms such as his have to pay more to ship eggs to market, and they have to pay more to get Styrofoam™ and other packaging materials trucked in.

Nationally, the cost of getting fresh eggs to customers increased 1.6 cents per dozen from the first quarter of 2004 to the first quarter of 2006. For the Midwest, the cost rose 1.85 cents in the same time frame, notes Gene Gregory, vice president, United Egg Producers, Atlanta. This may not seem like a lot, but it comes on top of the losses most producers are suffering due to overproduction, says Gregory.

The transportation losses are not universally distributed to Midwest producers. “I’m probably not a good one to talk to because it doesn’t affect us — all our eggs are sold f.o.b.,” says Richard Hall, general manager, Southwest Iowa Egg Cooperative, Massena. However, he adds, “if we don’t get fuel costs under control it will bring our entire economy to a halt.”

No one interviewed for this report says that high diesel fuel costs will cause Midwest egg operations to shut down, but some believe it could determine where egg production grows. Asked if high energy costs could influence where Sparboe’s future production facilities are located, the company’s Carlson says, “very definitely. No question about that.” Sparboe currently has operations in Minnesota, Iowa, and Colorado. In terms of importance, he says that energy issues “are on par with labor and feed issues” that companies such as his consider before locating in a state.

Feed favors Midwest

John Lawrence, economist at Iowa State University who has studied the egg industry, does not see the Midwest comparative advantage withering away due to high fuel costs. He cites one reason: feed. “It’s less costly to move the final product than feed,” he says.

That said, different states could vie for future production increases. Lawrence sees the possibility that if diesel costs stay high, egg production might grow more in states on the edges of the Corn Belt than in Iowa — Ohio, serving East Coast markets, and Nebraska, serving Los Angeles. Overall, however, there are many variables, “and there is still a natural advantage for Iowa,” in Lawrence’s view. He adds that while transportation costs have increased a few cents per pound for a tanker load of liquid eggs, “that’s not very much.”

Ohio State University economist Matthew Roberts does not rule out future growth of egg production in his state, but notes that Ohio producers have two disadvantages vs. Iowa producers: Ohio corn generally costs 15 to 20 cents more per bushel, and Ohio is more densely populated. The latter, he says, means that it can be tough to get a permit due to siting rules.

Golden Oval’s Lubitz says that the math still favors the Midwest: It takes 2.5 lbs. of feed to produce 1 lb. of liquid eggs. As a result, some say that higher energy costs could actually advantage the Midwest over other regions that have to ship in grain.

Ethanol raises costs

However, UEP’s Gregory says that Iowa’s historical advantage on feed may narrow due to the rapid growth of ethanol plants in the state. One reason Northwest Iowa and Southwest Minnesota have been so attractive to egg producers is that the basis for corn has been so wide, so feed costs have been lower than in other areas. But that could be changing, he says. If so, Iowa could lose part of its comparative advantage vs. other states, Gregory says, although it’s uncertain at this juncture just how much and whether that will offset the state’s advantages. The state still is going to be producing a lot of corn, it’s just that egg producers are going to have to be competing with ethanol plants to get it, he adds. Energy is important, but the cost of feed is far more important, Gregory says.

Fawzi Taha, egg specialist with USDA’s Economic Research Service, says that higher energy prices have a definite impact on egg production and prices: directly, due to higher transportation costs, “and indirectly, due to the new policy of converting part of U.S. corn and soybean production into ethanol and biodiesel,” thus competing with U.S. feed supplies. Feed costs make up 60% to 65% of total egg production costs, depending on location and plant horizontal integration, he says.

Adds Ohio State’s Roberts: “If you look at the value of a truckload of eggs vs. corn and soybean meal, there is no comparison. It makes sense to put layer facilities in an area where feed can be transported as little as possible.”

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