Agricultural Finance Table Egg Industry Outlook Executive summary Table egg prices have experienced increased volatility over the past two years. Avian flu decimated layer flocks in 05, and in response, producers ramped up production, resulting in oversupply in 07. The loss of layers in 05 led to a sharply narrowed price spread between conventional eggs and cage-free eggs, but the spread has widened again, as conventional egg prices have fallen at a faster pace than cage-free. As production slows and prices recover, tighter conventional supplies should cause the price ratio between conventional and cage-free eggs to return to more normal levels. Egg price volatility The outbreak of Highly Pathogenic Avian Influenza (HPAI) in 05 caused the death of roughly 40 million layers and pullets. The resulting loss of production caused a sharp appreciation in egg prices. Figure on the following page shows producers attempted to capitalize on favorable prices by rapidly replacing birds lost to HPAI. The increase in weekly egg sets in the summer of 05 led to a 7.% increase in egg production in 06 and helped production reach an all-time annual high of 89. billion eggs in the same year. Increased production since late 05 has put downward pressure on egg prices which declined 70% between September 05 and September 07.
Figure Change in Egg Sets and Table Egg Production Table egg production Eggs set in incubators Year over year change 0% 5% 0% 5% 0% 5% 0% -5% -0% -5% -0% -5% Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Conventional and cage-free price relationship Despite costing more to produce, cage-free egg production has expanded recently, largely in response to animal welfare legislation and pledges made by major retailers to exclusively purchase cage-free eggs. For example, California s Proposition and, more recently, a ballot initiative in Massachusetts prohibit various forms of animal confinement. In addition, major retailers such as Walmart and Kroger have committed to exclusively purchase cage-free eggs by 05. There is generally a price premium associated with cage-free eggs due to their higher production costs. Figure tracks the ratio of retail prices for cage-free eggs versus conventional eggs on a monthly basis over the past seven years. A ratio above one indicates retail prices for cage-free eggs were above those of conventional eggs. The ratio approached parity in September 05, at the peak of the HPAI outbreak, but has since risen due to a faster decline in conventional egg prices. Figure Retail Price Ratio: Cage-Free vs. Conventional Eggs 4 HPAI Cage-free large, White/ Grade A large, White Pre-HPAI Average.5.5.5 Jan-0 Apr-0 Jul-0 Oct-0 Jan- Apr- Jul- Oct- Jan- Ap-r Jul- Oct- Jan- Apr- Jul- Oct- Jan-4 Apr-4 Jul-4 Oct-4 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 MetLife Table Egg Industry Outlook
While retail prices for both types of eggs have declined since 05, conventional egg prices decreased 70% between September 05 and September 07 compared to a 7% price decrease for cage-free eggs. To capitalize on the price decline in conventional eggs, retailers increased advertising to drive in-store foot traffic. USDA data shows retail store circulars featured conventional eggs twice as often as cage-free eggs. While the price ratio would likely decline as retailers featured alternatives to cage-free eggs, anecdotal reports indicate secondary markets absorbed excess cage-free eggs at substantial price discounts, which preserved the retail price ratio. We expect aggressive featuring of conventional eggs by retailers to slow in the near future, which will reduce competition and reduce the number of cage-free eggs entering lower value markets. Supply pressure abating Following a 56% decline from record egg prices in 06, reduced production and rising demand have caused egg prices to stabilize. Figure plots a Table Egg Price-Feed Ratio, which measures industry momentum relative to January 007 by standardizing changes in egg and feed prices. Although significantly below the 05 peak, moderately higher egg prices and lower feed costs have lifted the index back above 007 levels. We expect the index to increase moderately over the next year as egg production is scaled back and feed costs remain low. Figure Table Egg Price-Feed Index.5.5.5 0.5 0 //07 //08 //09 //0 // // // //4 //5 //6 Record projected demand will provide additional price support to table eggs. Figure 4 on the following page tracks demand for table eggs using MetLife s Table Egg Demand Index, which looks at consumption of eggs through time while controlling for price changes. The chart shows that demand has consistently trended upward since 0, and remains strong relative to 005 despite being reduced slightly by HPAI in 05. Rising demand suggests that something other than price or quantity has changed consumers willingness to pay for eggs. Also, rising demand indicates that oversupply, rather than changes in consumer preference, is currently driving low egg prices. Two explanations for why consumers are more willing to pay for eggs today are income growth and/or improved perception of the product s quality. In a recent report, IBIS World attributed stronger egg demand to recent studies showing eggs can be consumed without significantly impacting cholesterol levels or raising the risk of heart disease. In addition, Mintel s recent Protein Report 4 indicates high protein content in eggs and good cholesterol levels are now driving many health based purchases. MetLife Table Egg Industry Outlook
Figure 4 Table Egg Demand Index.5..05 0.95 0.9 005 006 007 008 009 00 0 0 0 04 05 06 07F Looking ahead The U.S. layer flock contracted by.5% between December 06 and July 07 and the number of egg sets in incubators tracked closely behind. This reduction in egg sets in incubators indicates production will likely stabilize in the near future. We expect egg prices to recover as egg production slows and demand continues to increase. Endnotes In November 06 Massachusetts passed a ballot initiative, similar to California s Proposition, prohibiting various forms of animal confinement and selling out-of-state products that do not comply with new animal welfare regulations. Also, in May of 07 the Supreme Court denied a certiorari petition by six state attorneys general and governors, which aimed to overturn California s egg sales law A.B. 47, requiring any eggs sold in California to be compliant with the standards in Proposition. Calculated using own-price elasticity of -.08786. IBIS World Industry Report. August 07. 4 Mintel. The Protein Report: Meat Alternatives. January 07. Authors Eric Rama Head of Agricultural Research Blaine Nelson Associate Agricultural Research Ramsey Meigs Associate Agricultural Portfolio Unit MetLife Table Egg Industry Outlook 4
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