KNOW YOUR EGGS
In the past few days I have been listening to egg farmers, one face to face, three on the phone. In addition I have been listening to them on the radio and social media. Interestingly the emphasis on the radio and the press tends to be “If things won’t change there will be a shortage of eggs on the shop shelves”. Such a statement is an oversimplification of the argument to try and enlist public sympathy. Rather greater understanding of the market is required.
The problem with eggs is that they are reduced to a commodity, and like milk have become a low cost staple in shops used to pull people in to the shop. It is no accident that eggs will be adjacent to higher added-value bakery ingredients in the supermarket. On top of this there is a raging gap between the producer and the consumer. In most cases people buy eggs without thought of the farmer or where the egg and the chicken that laid it comes from.
The gap between producer and consumer is shortened by branding and marketing. We see this with Noble Food’s “Happy Egg” brand. It is successful because of the branding. The consumer isn’t just frying an egg with their bacon, they are frying a “happy” egg. As a result it is perceived to be better value and a premium is paid for the product. We see this gap closed very successfully here in Lincolnshire by the family owned Fairburn's eggs where they promote a premium product. In addition they invest in branded development as we see with their blue eggs. Their product is better, the shells are nice and thick and they have fabulous yolks. They add to that branding education about their eggs, how to use them and why they are superior. This has resulted in them being the largest independent egg producer in the UK.
Noble Foods, in contrast, have a different business model. They own all aspects of production in what’s called a vertical business model. This model does not exclude outside contractors, but they are secondary to the core business. But key to their business model is a dominant market share with premium branding only a small part of the market. It has to be remembered that a considerable amount of egg production goes into processing and this part of the industry is only just starting to upturn post-Covid so to understand that side of the market you need to examine the fortunes of the food processing companies. This business model can be a price maker as well as enjoying the economies of scale.
To control price in any way of a food product you either have to develop a dominant market share or a unique brand of quality. Nobel Foods and Fairburn's are food examples of each. Without the ability to do either of these the humble egg farmer is a price taker.
The problems that the farmer has are fourfold:
- Price of grain, feed and heating has gone up to such an extent that the costs out-strip the income from laying hens.
- Labour is now in such short supply that staff are in a position to dictate their pay or walk away. In Lincolnshire where there is a thriving food processing industry paying good wages there is plenty of choice of work and the egg farmer is possibly looking at up to 30% wage increase in some cases to retain labour.
- Avian Influenza taking away the ability to be free range with subsequent loss of derogation (ability to label “free range “ when it isn’t) with potential loss of a price premium.
- Substantial drop in worth of cull chickens (those that are slaughtered at the end of the 18 month laying cycle).
It needs to be considered that the trading cycle of a flock of hens is only about 18months. So if flocks are loss-making a farmer can cut his losses by not renewing his flock. Many will be forced to make this decision, but in doing so they will not necessarily be able to restart at the same scale for when staff are lost they will be reluctant to return.
What would I do if I were an egg farmer?
This is difficult and the answer would rely upon two things:
What percentage of my farm activity and cash generation relies upon eggs?
Do I have any long term borrowing that needs to be repaid/serviced ?
If my activity relied 100% upon egg production and I was operating under a contract to Noble foods I would cost out my operation and identify the key variable costs of heat, feed and labour and ask them whether a “cost per % “ contract was viable to them. In costing the egg producer has recently gained one valuable by-product, chicken shit. The value of manure should be recognised and the farmer needs to ensure he is obtaining its current financial worth in line with other fertilizers. The reality is if it is not viable to them it is not viable to you. I believe that their dominance and core business is strong enough for them to let go of contractors – this is the reality of any egg farmer relying upon a supply chain seeking lowest price supply to supermarkets. However, key to this is whether the lessons of 2010 have been learned and subsequently remembered. Supermarkets need surety of supply. Other producers also need surety of supply for their products. Do you remember in 2010 there being no M&S Scotch Eggs? The production line had to close down for a period. Now many processors use eggs in pasteurised liquid form or as a dried product that can be stored and stockpiled. Stockpiling and stock rotation is happening in the food processing industry ever since they prepared for Brexit, but Covid caused a drop in sales that is only just recovering. These dried and pasteurised eggs can be easily imported (remember the product recall of 2017 when the pesticide fipronil was found in Dutch eggs – most recalls were in processing).
If my activity was only part reliant upon egg production, for example alongside an arable farm I would do exactly the same costing process but also fit it into where it sits on the farm. Does this activity ensure full employment of otherwise part time staff? Is the manure helping mitigate other farm costs? How many flock cycles am I prepared to take a loss for or can afford to sustain the losses for? A mixed farmer, if able to weather this may benefit from a subsequent uplift, but this is a fine balance of walking into an unknown future and losses should never be chased for a prolonged period.
If borrowing money on the farm I would ask the following two key questions:
Is there enough cash be generated by the business to repay debt? This question needs considering in two parts. The repayment of long-term debt typically a farm mortgage, loan or finance on kit and repayment of working capital (typically on overdraft). The repayment of working capital is a question that needs answering regardless of whether the money is borrowed or not. Put simply, when you dispose of a flock of hens at the end of eighteen months have they generated more cash after costs than you spent obtaining the birds?
What is my farm net worth? If I take the value of all my assets and take away all my debts do I have a positive or negative figure? If it is a positive figure is it being reduced year on year? If it is dropping each year how long am I prepared to continue doing that? If my farm net worth is a negative figure how bad is it? Do I stand a chance of reversing this? Am I solvent?
This latter question is clearly a painful exercise but is the reality of farming. It is often sustained because farmers undervalue their own ability. A farmer is often a multi-skilled expert so much more than a “jack of all trades” and their worth to others is substantial. Yet too few capitalise on this.
Finally I ask the question, will shop shelves be empty of eggs?
In answering this we should consider the following: Europe’s largest egg producer is Avangardco based in the Ukraine it produces 49% of Europe’s egg production and 91% of its dried egg production. Whilst the UK does not rely upon the Ukraine for its eggs the market in Europe as a whole does. This means that processed egg from Holland is more likely to travel west than be imported into the UK. Eggs in shells are not so easy to transport and so supply of these to shops is predominantly UK based with the trusted lion mark. I believe there has been sufficient investment in the supply chain for the larger producers to continue without interruption to eggs on the shelves. However, I do believe there is a high risk of supply disruption in the food processing industry as supplies of powdered and pasteurised eggs come under pressure with lower levels of imports.
I quite expect after I post this some fool will show a picture on social media of a shop with no eggs on the shelf. This is not necessarily due to egg shortage, but rather another issue in food distribution that is key, transport cost. Because of transport costs shops are increasingly running from full to empty and the top up distribution of smaller lorries, especially to smaller shops, is not happening. As a result you are seeing an increase of shops running low or running out of product between delivery. This can be most visible at weekends or early in a working week when stocks are low.