Cycles of boom and bust for egg producers getting worse
The cycles of boom and bust in the United Kingdom egg market are getting worse, according to Robert Gooch, policy director with the British Free Range Egg Producers' Association (BFREPA).
His warning came during two speeches he made to the BFREPA annual meeting and conference last month, when he warned of tough times ahead for the industry in 2013 and 2014. "In the short term future we are facing a big challenge," he told free range egg producers who have already been struggling in the face of overproduction, high feed costs and the failure of egg prices to keep pace with those feed costs. He appealed for an end to in-fighting; for the whole supply chain to pull together for the benefit of everyone in the industry.
Over the last 12 months BFREPA has invested heavily in initiatives to try to plot a better future for the free range egg sector. Robert, himself, was appointed 12 months ago as the association's first policy director. BFREPA is putting money into marketing free range eggs and time and money have been invested in producer benchmarking, flock surveys and the development of egg marketing modeling to help the association predict future ups and downs in the market. During his speeches at the BFREPA annual meeting and conference Robert Gooch outlined his work on the market model and revealed what the model was currently predicting for the immediate future.
"The cycles of boom and bust are getting bigger, which is a concern. Obviously the bigger the cycles are, the more the effect on producers' businesses and their ability to withstand shocks. It's all very well having a great boom, but if the business is not strong enough to withstand the shock of the bust afterwards the benefits of the boom are limited," he said.
He said producing an effective model had been difficult because of a number of distortions in the market. Those distortions included the introduction of the conventional cage ban, changes in stocking rates and grants paid to free range by devolved governments that had resulted in increased production in Scotland, Wales and Northern Ireland more than making up for decreased production in England.
However, he said the model indicated where the market was currently, with supply and demand tight, close to equilibrium, and prices rising. He said the model predicted that production would increase through to the third quarter of 2013. "Profitability will fall as a result of high food prices. That will likely lead to a fall in production by the fourth quarter of 2013, bottoming out in 2015." He said that price rises should continue to the end of this year before the boom and bust cycle repeated itself. "These extremes of boom and bust are becoming more extreme. They are getting worse. We can argue and debate about whether the model is right in terms of timing but I don't think we can argue it isn't going to happen because, historically, it's happened and it's going to happen again."
He said that the work that BFREPA had been undertaking, with support from the NFU and the packers' organisation, NEMAL, was an attempt to examine supply and demand to avoid or mitigate periods of oversupply or undersupply, which were highly inefficient. "It's a market failure when that happens for the whole supply chain and, from our point of view, because we carry most of the risk as producers, it can produce a big loss of capital for us. It is something we are interested in, although you can understand that some of the supply chain are not so interested because we carry the main risk as producers."
Robert said that to create the model he had looked at what had happened in the market historically, using ADAS and Defra data. He said that since 2002 free range egg production had risen by 150,000 cases a year on average and prices by two and three quarter pence per dozen per year. He said that, historically, underproduction had been as much an element in the market as overproduction. Robert said that the industry had to try to "get our heads around production" so that people had a better feel for where they could take their businesses.
He said that margin over feed was far more important than the egg price in itself and something he was keen to pursue was the possibility of feed tracker contracts for egg producers who wanted to protect themselves from huge increases in the price of animal feed. Major packers did not seem particularly keen on such contracts and he was not sure that it was something supported by everyone within BFREPA, although he felt they may be welcome to egg producers who wanted to pursue a low risk strategy.
He said losing money was bad enough, but volatility in the market affected confidence amongst egg producers. A recent NFU survey showed that confidence was low amongst egg producers - and most of the egg producers surveyed worked in the free range sector.
"We have got challenges ahead and that should focus our minds on working more closely with our supply chain partners," said Robert, who said he was surprised following his appointment as policy director to discover the amount of "mudslinging" that went on in the industry. He said conspiracy theories did not help and any allegations should be made through the correct authorities and, within BFREPA, through regional representatives to the association's council.
"Packers and retailers are customers," he said. "We need to work with them." He said the industry needed packers of all sizes, and that included big packers, who could work with retailers to get producers' products to market. Robert also praised Lion as a "brilliant barrier" to imports. Everyone needed to work together.
Whilst he warned of difficulties ahead in the short term, Robert said that the long-term future for free range eggs was a rosy one. "Lion tells us that free range egg sales continue to grow - year-on-year every year for the last five years. It is my view, backed up by the model, that free range share will continue to grow and will plateau at 70 per cent. We haven't got a time frame on that, but it is my view that we will reach 70 per cent at some time in the future.
"That doesn't mean I want you to go out and increase your flock sizes now. We have got to use the survey; we have got to use the model to undershoot slightly the rising demand. We don't want to overshoot it. This is where the problem has been before. We want to slightly undershoot it. So look at the information and when the economy picks up use it to plan accordingly."
Robert said that the UK led the world in free range eggs. The country must be the world's biggest producer of free range eggs. This would lead to businesses opportunities abroad. Happy Egg was already in America, he said, and he encouraged others to broaden their horizons beyond the UK. As non-cage took off in other countries - as he was sure it would over time - there would be the opportunity to export this country's skills and knowledge to other markets.
