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.

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 2004.

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