The egg industry has an overproduction problem

by Ron Sterk
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Low egg prices
Large, Grade A eggs were featured at 49c a dozen by a major Midwest supermarket chain in early December.

KANSAS CITY — Large, Grade A eggs were featured at 49c a dozen by a major Midwest supermarket chain in early December. The average wholesale price for large eggs quoted by the U.S. Department of Agriculture as of Dec. 2 was 45½c a dozen in the Midwest, the lowest of the four regions reported. Neither price would cover the cost of packaging and transportation, one industry source said. It is evidence of the deep problem the egg industry is having getting production under control.

October production of 7,506 million table eggs was the highest for any month since February 2015, two months before laying hen numbers began declining sharply because of an outbreak of avian influenza last year, according to the latest U.S.D.A. Chickens and Eggs report. October 2016 egg production was up 11% from October 2015, when flocks were being replenished, and was up 1% from October 2014, prior to the A.I. outbreak.

The oversupply of eggs has been reflected in prices since April, when average Grade A large egg prices dipped below 60c a dozen and breaking stock (used by processors to derive liquid, frozen and dried whole egg, yolk and white) fell to near 30c a dozen, both the lowest values since October 2010. Since April average Grade A large egg prices have fluctuated between 37½c to 77½c a dozen. Graded egg prices briefly moved higher when grocers featured eggs at low prices, only to move lower once the features were over. Breaking stock egg prices kept falling since April and have been under 20c a dozen since late July, which is well below cost of production.

Egg production
October production of 7,506 million table eggs was the highest for any month since February 2015.

Typically, when egg prices fall below cost of production, producers adjust flock sizes by putting some hens into forced molt or by culling older, less productive birds. And, processors historically have bought up low-priced eggs shifted from retail and built inventories for when prices move higher, in effect carrying the risk of oversupply. Neither appears to have happened to a significant degree this year.

One scenario suggested by industry sources is a number of egg producers added facilities and laying hens, to comply with new cage-free requirements that several major restaurant chains and food manufacturers said they would move to over the next several years. That production came on-line sooner than expected (or needed), and at least in some cases was not countered by a reduction in the number of hens housed in traditional “battery cages,” thus resulting in more eggs. Others have suggested the cost of rebuilding flocks after the A.I. outbreak discouraged culling of birds. And some indicated disposal options of culled hens may have been limited by the massive disposal during the A.I. catastrophe. Also, low feed prices have helped to reduce breakeven costs for egg producers.

Processors, meanwhile, have been reluctant to buy cheap eggs because they lack confidence that prices will move significantly higher and stay at those higher levels as long as egg production exceeds demand. Processors that are part of vertically integrated operations have taken on extra supply, but independent processors have tended not to build inventories just because eggs are cheap.

Egg-laying hens
When egg prices fall below cost of production, producers adjust flock sizes by putting some hens into forced molt or by culling older, less productive birds.

The most significant issue appears to be on the demand side, especially from food manufacturers who use egg products. Many were forced to switch to egg and egg product replacers because of egg shortages and record high prices during the A.I. outbreak. Some of that business never came back to real eggs, while the supply of real eggs and egg products has fully recovered. Thus, egg production and supply has not adjusted to lower demand.

There may be some light at the end of the tunnel, although most industry sources expect it will be only temporary until producers get serious about reducing flock sizes. Egg prices turned modestly higher last week and typically see increased retail demand from Christmas baking in December. Further, producers also tend to move more birds into forced molt at the start of the year. Whether that will be enough to turn the tide of overproduction remains to be seen. 

 
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