Max Bowman, chief financial officer of Cal-Maine Foods, addressed the current egg market due to the COVID-19 pandemic, and what implications it might have on the industry.
Bowman also addressed how Cal-Maine is handling the virus-related situation during an April 2 conference call hosted by Stephens, in which Cal-Maine's financial results for the third quarter of fiscal year 2020 were discussed.
"We believe we are taking all the needed precautions in the management of our operations in the response of the outbreak of COVID-19. To date, Cal-Maine Foods facilities are operating relatively normally, and we have not experienced any supply chain or delivery disruptions," Bowman said.
He emphasized that the company's top priority is the health and safety of its employees. "As part of the nation's food supply, we work in a critical infrastructure industry and we have a special responsibility to maintain a normal work schedule," he said.
The company is providing all employees with supplemental pay to assist them and their families.
Cal-Maine Foods is emphasizing communication within the company, and has made it a priority to follow the U.S. Centers for Disease Control and Prevention (CDC) and other government agency guidelines for implementing procedures to protect employees. The company has strict sanitation and biosecurity protocols in place throughout its operations.
"We remain focused on meeting the current high demand for eggs," he said. However, the company is prepared to take any necessary steps needed to protect its employees, customers and other stakeholders.
Bowman recognized that COVID-19 is undoubtedly changing the egg market in terms of price, and that there will be a lot of things for producers to consider in the days to come.
Will higher egg prices generate a rise in production?
Ben Bienvenu, managing director of Food/Agribusiness with Stephens asked Bowman multiple questions regarding COVID-19.
Bienvenu started by acknowledging the decline in total hen numbers according to the USDA Chicken and Eggs report. He then asked Bowman what his impressions of the cutbacks are, and if he believes that the higher egg prices due to COVID-19 will drive producers to ramp production back up.
Bowman explained that he cannot speak for all producers, but that he believes the drop of nearly 12 million hens in a year is dramatic.
"Clearly the industry and others were looking at cutbacks, but as we started a year ago, in Easter season, we saw the market fall. That started an unprecedented or weak market that has persisted for the latter half of 2019 and the start of 2020. It is hard to know how producers will react, but I think clearly the prices we saw during this time period were not sustainable," he said.
As companies enter the fourth quarter and experience the dramatic change in egg prices due to the virus, they find themselves in a highly unusual situation, Bowman explained. He expects that egg producers in the short term will try to maximize production during this time because the demand is certainly there. "Our customers are still pushing us for every egg that we can bring them, and we are doing our best to do that," he said.
However, Bowman said he thinks before producers ramp up production due to the COVID-19 pandemic, they will consider how bad the market has been over the year, and that they don't know how long the current situation could last.
Either way, it would take time for the market to see the impact of hen numbers rising.
The shift in demand from foodservice to retail
Due to COVID-19, eggs needed in the foodservice sector have declined drastically, leaving producers with customers in that area left to find a new avenue of sales. Bienvenu asked Bowman to explain how challenging this process is.
For companies like Cal-Maine who sell 90% of its eggs to retail, it is less of a challenge, Bowman explained. "When you look at the U.S. egg industry, about 60% of eggs get sold into the retail channel as shell eggs. About 7% get sold into the foodservice area as shell eggs. Then you have about 30% that are egg products and then somewhere around 3% or so are sold as exports," he said.
He explained that a lot of the available foodservice eggs are easy to move into the retail channel. "One of the biggest challenges would just be having the appropriate packing to put the eggs in. Otherwise, it's pretty easy to shift that 7% around," he said.
The less than 10% of eggs that Cal-Maine would typically sell to the foodservice sector have been sold in the retail channel.
"As it relates to the egg products side, that's where there is a bigger challenge. Some of those producers can't pack and grade eggs to get them into the retail food channel," Bowman explained.
Some of the producers that are facing these challenges might find it best to sell the eggs they have to producers that can handle the packing and grading the product. Bowman noted that companies like Cal-Maine are trying to buy some of these additional eggs to meet its customers' demands.
Egg price increase
There has been a huge price increase for eggs due to the current circumstances. Bienvenu explained that he doesn't think anyone expects eggs to stay at over US$3 for a long time, but given the supply cutbacks that the egg industry has had and the strong retail demand for large eggs at this time, he asked Bowman how long he thinks this more constructive egg market environment could last.
"That's difficult on a lot of levels," Bowman said. The pandemic has a huge play on the current egg market, and no one knows how long the impact of the virus will last. "I sense that with the country shut down until at least the end of April and events being canceled in the summertime, it looks to me that we will be in some sort of lockdown for some extended time. I think that provides an environment where eggs-at-retail demand should remain strong," he said. Families are buying and consuming eggs while they are home because they are a clean and well-priced form of protein, he added.
Like Bienvenu, Bowman doesn't expect eggs to stay over the $3 mark. "The demand is certainly there right now and it could stay. Inventory levels reported on Monday (March 30) by the USDA were significantly behind the numbers from last year for shell eggs," he said. Some areas are reporting that the demand is slowing down and that consumers can get the eggs that they need by buying medium-sized eggs that would have gone into the foodservice market.
"I expect a good market for some time while we're in this situation, I don't know though to what level. A $3 market is hard to sustain, its historic. I think we are at an all-time high by a good margin right now. I don't know that it is going to stay at these levels, but hopefully, it will stay at a higher, more sustainable level than we saw for most of 2019 and the first part of 2020," he said.
Easter could also create an increase in demand and will potentially put pressure on egg companies to come up with more retail eggs.
Has the spike in conventional egg prices helped demand for specialty eggs?
Since conventional egg prices are so high, prices for specialty eggs may seem more reasonable than what they typically do. "Conventional pricing has gone up so much that when specialty eggs were available people were buying them in volumes," he said.
He said he believed we will see a higher volume of sales for specialty egg sales in the fourth quarter, assuming conventional egg prices remain high.
FDA provides flexability to Egg Safety Rule during COVID-19: www.WATTAgNet.com/articles/40028
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