Defying the law of supply and demand
The last time I checked the law of supply and demand was
still operative. At least as far as it concerns the US egg market, devoid of
Governmental control or price supports. A compilation of production costs, unit
revenue and margins, issued by Don Bell of California, illustrates the folly of
ignoring the most basic principle of economics. By Simon
The last time I checked the law of supply and demand was still operative. At
least as far as it concerns the US egg market, devoid of Governmental control or
price supports. A compilation of production costs, unit revenue and margins,
issued by Don Bell of California, illustrates the folly of ignoring the most
basic principle of economics.
For the first seven months of 2006 production cost of nest-run eggs at the
farm gate have averaged €0.36/dozen including feed (54%), hen depreciation
(16%), fixed costs, interest and labour. This is evidence of efficient
management of costs given the price of feed ingredients at €125/ton and 16 week
old pullets at €1.90. The problem lies in depressed revenue which averaged
€0.58/ dozen graded and packed and the €0.23 /dozen paid by breaking plants. The
cumulative loss over the first seven months of 2006 is estimated at €0.88/hen,
with the likelihood of this value increasing by the end of the year.
There are simply too many hens to support profit and to provide a return on
investment in a market which is fairly static. Egg consumption has increased by
an annual average of 0.38% since 2003 to attain 258.6 eggs/capita, projected for
the current year, representing a total of 6,542 million dozen. The wholesale
price of eggs is reduced by €0.025/dozen for each million hens above the
projected 2 million increase per year required to satisfy population growth at
the current level of hen production. This value is based on analysis of data
assembled since 1996 by egg industry economists. The US flock averaged 289.2
million hens over the first half of 2006. Although pullet replacements for this
period are 2.5% lower than in 2005 the 2006 value is still 2.8% greater than in
The oversupply situation is reflected in company earnings. Cal-Maine Inc. the
Nation's largest producer reported an €8.3 million loss for FY 2005 and an €0.8
million loss on sales of €398 in FY 2006. Moark the subsidiary of Land 'O Lakes
posted a loss of €10 million on a sales volume of €178 million during the first
half of the current year and is currently for sale.
The US Industry benefited from a transitory reduction in production volume in
2003/2004 when cage density was reduced, one large mid-Western operation was
forced to limit hen numbers as a result of environmental infractions and
concurrently 3 million hens were depleted due to Newcastle disease in
California. This period demonstrated the price elasticity of eggs with wholesale
values for 2003 and 2004 averaging €0.73 and €0.69/dozen respectively compared
to €0.62 and €0.58/dozen during the two succeeding years.
It is obvious that oversupply depresses the unit revenue
for commodities. When efficiency optimizes the cost of production, economies of
scale in egg production have limited capacity to enhance profit. Frequently
deterioration in the return on investment is recorded by producers. The US Egg
Industry must reduce output by limiting the size of the National flock. This can
be achieved by reducing chick placements and early depletion of flocks including
a strategy of restricting molting. It is said that "low prices cure low prices".
Perhaps the major egg producers will recognize the folly of competitive
expansion to achieve lower costs. It is possible that reason is emerging. Let us
hope so, since the financial resources of producers committed to generic
production are exhausted. There is negligible confidence in the investment
community and among bankers that the Industry can continue on its traditional
course or could withstand a major episode of disease or consumer rejection due
to eggborne infection.
By: Simon Shane
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