An egg scramble case study
Prime Future 173: the newsletter for innovators in livestock, meat, and dairy
I don't make it a habit to read academic papers, but I found this one riveting (really 😂).
The transition from conventional housing to cage-free is such a dynamic topic because there are so many divergent parties & objectives at play:
How retailers position themselves in a competitive market.
What consumers say they want vs. what their wallets say they want.
Activist groups’ agendas.
What voters thought they wanted.
What producers need in order to operate profitably over the long run.
The layer industry doesn't get nearly enough air time, so let's start with a bit of context around industry structure:
“The United States is the second largest egg producer in the world, with 111 billion eggs produced in 2021. Of the 329 million laying hens, 29.3% are housed in cage-free systems.”
“The average producer supplies 59% of eggs to retail, 24% to food service, 11% to manufacturing, and 2% to exports.”
“In the conventional egg market, 32% of conventional eggs are sold with contracts tied to an external price, 29% using cost-plus contracts, and 11% using spot markets, on average. Cage-free eggs are more likely than conventional eggs to be sold using cost-plus contracts. On average, 14% of cage-free eggs are sold with contracts tied to an external price, 49% using cost-plus contracts, and 9% of cage-free eggs are sold on the spot market."
The situation at hand reached a tipping point several years ago at the ballot box and in the board room of multiple large food retailers as "Ten states and many food retailers have pledged to phase out the sale of conventional eggs by January 2026.”
You might say this creates an opportunity for early movers to capture market share in the long run by becoming a preferred supplier to these retailers with cage-free commitments and/or to capture a premium in the short run.
But it isn’t so straightforward.
“With the challenges associated with the cage-free transition, egg producers are skeptical that the industry can meet all existing (retailer) pledges by 2026.
Higher fixed and variable costs, limited customer demand, and higher environmental impact were among the most notable challenges to cage-free adoption.
With heightened production costs, lower production efficiency, and increased production risk, there is also concern over food affordability and food security."
Consider two things:
(1) The transition from conventional to cage-free housing has huge implications on the cost structure of egg layer businesses:
"In fact, the most common response for capital (fixed and variable) and labor costs was that cage-free expenses are at least 20% higher. ...suggest that operating costs in cage-free systems are 23% higher than in conventional systems, primarily driven by the differences in labor and feed costs. Additionally, the authors indicate that average total costs in cage-free systems are 36% higher than conventional systems due to the higher fixed capital costs, lower stocking densities, etc."
(2) Actual consumer behavior when deciding between conventional and cage-free eggs is a total narrative violation to the prevailing assumptions about consumers:
“Retailers that did try to make the decision (to offer cage-free) when the conventional option was still present saw consumers continue to buy the conventional option. Then, when they subsequently removed the conventional option, they experienced a significant decline in egg sales.”
It’s a classic situation of what people say they want and what they are willing to pay for are two separate things, and the chasm between the two is where the economic opportunity and/or challenge lies for producers.
“Most of the transition relies on the soft commitments made by retailers. This adds a layer of complexity to the U.S. cage-free egg market transition, heightening risk and uncertainty in investment decisions.”
Plenty of progressive producers jumped at the opportunity to differentiate and capture the premium market, which is why almost 1/3 of production is already cage-free housing.
But from here on, the confusion is largely created by competing regulatory and market drivers. If the situation were driven entirely by one or the other then it would be much easier to chart a path forward.
If every state had legislative mandates then the entire industry would shift - easy. But it’s only 10 out of 50 states.
And if retailers could offer a premium for cafe-free eggs - easy. But large retailers made commitments that are not panning out at checkout counters.
When I put my CEO hat on, I’m honestly not sure what I’d be doing if I were running an egg company, particularly a midsize company.
It’s a quagmire. A conundrum. A pickle.
The paper effectively describes the tricky situation that egg producers find themselves in of trying to time when and how to move in order to stay in sync with market prices that are not currently rewarding the increased investment or the increased ongoing production costs of cage-free production.
In general, across ag, there always seems to be a LOT of hand-wringing about potential regulations or downstream trends that could impact how we operate. All that hand-wringing usually turns out to be pointless because either a) it doesn’t happen, or b) producers find ways to make it work. As they learn the new way of operating, they learn how to get super efficient at it and after some time on a learning curve, its a non-issue.
But this one is different because it’s not just about transforming ongoing operations; there are significant capital investment decisions that are not easily reversible. This isn’t a case of change-resistant producers, this is a case of existential importance to get the timing right in making huge capex decisions with huge opex implications…for an unknown size of the prize on the back end.
And these decisions are not easily reversible. A layer producer’s ability to go from conventional housing to cage-free housing back to conventional housing if the economics don’t work is not at all the same as, for example, a large poultry integrator’s decisions over the past several years to go from conventional to antibiotic-free production back to conventional production. One is a cap ex intensive decision, one is a flip of the switch at the feedmill with some marketing & PR management around it.
There’s also a psychological element here that I’ve heard from multiple egg producers: it’s difficult to go from the calm, clean, quiet of conventional layer houses that one producer describes as “chicken condos” to the messy, noisy, chaos of cage-free houses. It feels to producers like going backward, and that’s just generally not fun…especially given the economic complexities.
Alas, the invisible hand has a way of sorting these things out in the long run.
Today let’s look at 3 wide-ranging ideas about emerging trends & innovation that jump out from this situation, each with relevance far beyond the world of table eggs.
(oh and World Egg Day was this past week which is weird because I thought that was every day but whatever.)
Let’s dig in:
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