Editorial

 

The Conversion to Cage-Free – Who Pays?

Apr 29, 2016

    

Justin Morten published a review of egg prices and the move to cage-free sourcing in Bloomberg on March 28th. The article includes a timeline of announcements of the intentions of manufacturers, restaurants and food service suppliers to source eggs from other than conventional cages. 

Morten notes that the switch to “cage-free” might not be entirely altruistic. He points out that the price differential between conventional eggs and cage-free product at the present time will result in higher revenue per unit of shelf space as producers’ transition to cage-free products.  Bloomberg estimates that in 2015, five percent of eggs were derived from cage-free systems.  

  

This figure is clearly low if organic and alternative systems including barns, aviaries and enriched colony cages are taken into account. It is estimated that 13 percent of U.S. shell-eggs (based on a population of 200 million hens) are derived from flocks housed in other than conventional cages.

The article notes that motivation to transition to cage-free is complex and multi-factorial.  Spokespersons representing restaurants have suggested that “consumer demand” is a significant driver of change.  In point of fact, there are no reliable independent studies to gauge consumer sentiment on this issue.  There has admittedly been considerable pressure generated by the HSUS and kindred organizations using social media but whether this in fact reflects actual consumer opinion or whether the so-called “studies” were developed to present biased data is difficult to analyze. 

The only reliable method to judge consumer intent is to conduct a conjoint analysis.  Subjects are shown a number of alternatives with various attributes including nutrient content, housing and prices and are asked to reject unacceptable offerings and to grade those that they would buy assigning a weighting adding to 100 percent. Using this market research technique it is possible to isolate and quantify the specific motivators relating to the purchase decision.  Simply asking consumers if they would like their eggs to be “derived from flocks allowed free access in barns or pasture-- compared to being cramped in cages with less space than an iPad” will provide a fairly predictable response. EGG-CITE has previously noted that this kind of “garbage survey” rises to the level of asking 10-year old children whether they are in favor of ice cream.

There is also a measure of trying to “out-welfare” opposing retailers and restaurants.  This is especially the case with restaurants and stores that wish to burnish their image while catering to an affluent clientele willing to pay for sentiment and non-quantifiable aspirational attributes.

Some public companies have been deluged with shareholder proposals to switch to cage-free eggs.  Again it is questioned whether the frequency and intensity of resolutions reflects shareholder sentiment or whether submissions are stage managed as with the Yakuza in Japan.

Irrespective of the motivation to convert to cage-free, the reality is that decisions have been made and the industry will be obliged to convert to alternative systems but with substantial progress demonstrated annually over the proximal ten years.

The adoption of a uniform federal standard as proposed in the “Egg Bill” would undoubtedly have been a productive measure.  Now we are faced with developing and accepting standard definitions and nomenclature for “free-range”; “pastured reared”; “barn-housed”; “aviary-housed” eggs. The egg-industry and their customers including retail chains and restaurants must operate with a common language and on a level playing field.

 It remains to be seen whether movable cage-fronts will be acceptable for aviary systems. It will also be necessary to establish a range of ratios relating floor area to number of hens.  Even in the case of USDA Certified Organic, there is still no specific requirement for outside area either with respect to space per hen or duration of access to pasture or mud as the case may be.

At present companies are falling over themselves to commit to systems which are neither defined nor approved by either individual customers or industry groups. All producers using conventional cages are faced with the need to invest capital in upgrading their facilities and installing new equipment. Since density within buildings will be reduced expansion of facilities will be required to maintain the current volume of production. There is no clear idea of what may or may not be acceptable now and perhaps ten years in the future.  It is evident that considerable negotiation will be required to achieve acceptable standards and a mutual understanding of specifications required. As yet nobody has taken the initiative to address the issue. Buyers of shell eggs represent a cascade of commitments to “cage free” without understanding the implications or costs of their public statements.

 It is inevitable that retail prices will increase to reflect incremental fixed and variable costs associated with a transition from caged flocks to alternative housing systems. Inevitably the Law of Supply And Demand will prevail. It must be expected that the current differential between conventional eggs and those derived from alternative systems will narrow.  It would therefore be a worthwhile exercise for a team of agricultural economists to establish the price elasticity of eggs based on the profound fluctuations in price occasioned by the 2015 outbreak of avian influenza.  The study could be used to project forward prices under a variety of scenarios.  Without appropriate economic evaluation, U.S. egg producers will be obliged to make capital investments without a clear idea of future trends in demand and willingness to pay.

   

Egg Industry News

 

SOURCE OF SALMONELLA FOR PASTURE HENS

Apr 29, 2016

    

A recent article in the Journal of the American Veterinary Medical Association * noted the high prevalence rate of Salmonella enterica in reptiles surveyed at the Bronx Zoo.  Salmonella Diarizonae was recovered from 24 percent of a wide range of 78 snakes in the collection. 

This observation was a reminder of a late 1980s case of salmonellosis caused by S. Arizonae in the reproductive tract of ostriches on pasture in Texas.  In various parts of the U.S. where snakes, lizards and tortoises occur on the same acreage as pastured hens, it should be expected that foraging will result in infection with possible flock health or zoonotic implications.  

*Clancy M.M. et al Salmonella Infection and Carriage in Reptiles in a Zoological Collection. JAVMA.248:1050-1059

   
   
 

DAILY TABLE ORGANIZATION REDUCES FOOD WASTE

Apr 29, 2016

    

Daily Table founded in 2015 by Doug Rauch, previously President of Trader Joe’s Company serves the Dorchester region of Boston.  The nonprofit gathers fresh and date-expired and “ugly” but wholesome food from supermarkets, growers, manufacturers and other suppliers to be sold to needy residents at low prices.

Recently Rauch was honored in the 2016 Giver Category on a list of People Shaping the Retail Future.

  

Each year in the U.S. 80 billion pounds of edible food is wasted representing almost 30 percent of what is grown.  Daily Table has recovered and made available 600,000 pounds of food since inception of the project.

   
 

Weis Markets Planning New Stores

Apr 29, 2016

    

According to PennLive Weis Markets intend to erect three news stores during 2016.  Capital investment will include $140 million on upgrades and expansion including three Gas ‘N Go locations and twenty existing stores will be remodeled during the fiscal year.

For Fiscal 2015 ending December 31st 2015, Weis Markets reported a 3.6 percent increase in sales to $2.9 billion and a comparable same store sales increase of 3.7 percent. Net income increased by 9.1 percent to $59 million.

  

Family-operated Weis Markets operates 162 stores in five northeastern states and is characterized by solid customer loyalty.

   
 

RELATIVE INCIDENCE OF CONFIRMED SALMONELLA INFECTIOS 2015

Apr 29, 2016

    

The Centers for Disease Control and Prevention have released data on 6,827 Salmonella isolates fully stereotyped in 2015.  The incidence rate express as cases per 100,000 population for the major salmonella stereotypes were:

Stereotype                Number of Cases                 Incidence Rate

Enteritidis                               1,358                               2.79

Typhimurium                            816                                1.68

Newport                                    639                                1.52

Javiana                                      557                                1.15

Poona                                        197                               0.40

Muenchen                                 181                                0.37

Heidelberg                                153                                0.31

Saintpaul                                  148                                 0.30

 

The review of the serotypes did not indicate vehicle of infection although it is recognize that S. Enteritidis is no longer associated with eggs derived from commercial flocks subscribing to the UEP 5-Star Egg Safety Program.  In addition since 2010, all flocks over 3,000 hens must conform the requirements of the FDA Final Rule on Prevention Of Salmonella which includes periodic assays of environmental samples to detect the presence of intestinal SE colonization.

   

 

   
 

UEP Appoints director of Animal Welfare

Apr 29, 2016

    

The United Egg Producers has announced that Ms. Sarah Stephenson has been appointed to the position of Director of Animal Welfare.  She will administer the UEP Certified Program and will coordinate with the Scientific Advisory Council for Animal Welfare, the Producer Committee for Animal Welfare and other entities in the industry.

Ms. Stephenson recently graduated from Auburn University with a major in Poultry Science.

   
   
 

USDA Weekly Price and Inventory Report, April 25th 2016.

Apr 29, 2016

    

Midwest-wholesale prices for Extra Large and Large sizes initially stabilized and then increased by 3 percent by the end of the past week, after losing approximately 3 percent in value the previous week from a base of unseasonably low prices resulting from a downward trajectory over the previous five consecutive weeks.

The USDA Combined Region value for Large commodity eggs which lags the Midwest quotation by one week, fell 1 cent per dozen to $0.65 cents per dozen, compared to the 12-month trailing peak price of $2.77 in mid-August 2015.  The USDA Combined range for Large, fell by 2 cents to $0.59 cents per dozen in the Midwest and in the Southeast Region, price also fell 2 cents to $0.67 per dozen. Combined Region price declined by a total of 82 cents per dozen through January and early February and after a brief pre-Easter rise, stabilized before sharply falling. The current Combined region price is about 45 cents per dozen below the three-year average.

  

The four-week trend suggests stable to slightly higher prices through the last week of April and into May. The National flock is still down by 8 to10 million hens at 292 million. This figure suggests depletion of 1 million hens producing for the shell-egg market during the past week consistent with previous disposal of older flocks following extremely low post- Easter prices. Over 75 percent of the deficit in producing hens was in the breaking segment of the Industry.

The market will respond to changes in availability of both shell eggs and breaking stock attributed to re-stocking, projected exports and cessation of imports of breaking stock from the EU.  

 Cold storage stocks in selected regions on April18th amounted to 2.731 million pounds, 1.2 percent below the stock of 2.764 million pounds during the week of April 1st representing a slight decline in frozen stock.

   
 

Cal-Maine Foods Burkenroad Investment Conference

Apr 28, 2016

    

On April 22nd, Cal-Maine Foods made its annual presentation at the Burkenroad Reports Investment Conference.

Founded in 1957, Cal-Maine Foods has expanded by acquisition of competitors including Ralston-Purina egg operations in 1972 followed by 18 subsequent takeovers over the past 25 years. The company issued an IPO in 1996 and trades on the NASDAQ under the symbol CALM.

  

Cal-Maine is fully integrated from parent level flocks through rearing, laying, packing and distribution.  The Company is independent with regard to feed supply with on-site mixing on most complexes.

The following key data was presented:-

  • Sales value increased from $477.6 million in 2006 to $1.579 billion in 2015 representing a 12.2 percent annual growth rate. 
  • Volume of annual sales increased from 683.1 million dozen in 2006 to 1.063 billion dozen in 2016 representing a 6.1 percent compounded annual growth rate.
  • Unit value increased from $0.70 cents per dozen in 2006 to $1.48 per dozen in 2015 representing a 7.6 percent compound annual growth rate.
  • Approximately 96 percent of total production was derived from 36.4 million Company-owned hens in 2015, with 4 percent supplied by contractors operating cage-free housing.
  • Cal-Maine is heavily committed to retail with 90 percent of sales through this channel. Food service represents 7 percent and the remaining 3 percent of sales comprises egg liquid processed in plants in Georgia and Texas.
  • The top ten customers for Cal-Maine eggs represent 67.9 percent of sales value with Wal-Mart Stores and Sam’s Club directly and indirectly through CCF brands representing 35 percent of total sales value.  H-E-B constituted 9.3 percent of sales and Publix Supermarkets 8.4 percent of sales.
  • Feed costs on average parallel the industry and Cal-Maine Foods does not hedge ingredient purchases.
  • Over a nine-year period, cost per dozen has ranged from 22 cents during the first quarter of 2007 to a peak of 57 cents per dozen in the same quarter of 2013 reflecting the high price of ingredients. In this year the price of corn peaked at $8.00 per bushel and soybean meal was $500 per ton.  Production costs during the third quarter of 2016 attained 41 cents per dozen.
  •  For the third quarter of 2016, specialty eggs including Eggland’s Best, 4 Grain and Farmhouse represented 24.9 percent of volume and 29.6 percent of sales value.
  • In 2014, Cal-Maine Foods exercised options and purchased the remaining 50 percent of the shareholding in Delta Egg Farms in Utah and a cage-free/organic facility in Chase Kansas from Land ‘O Lakes consolidating ownership of 1.6 million hens.
  • Cal-Maine Foods has entered into a joint venture with Rose Acre Farms to develop Red River Valley Egg Farms LLC near Bogata, TX.  The initial capacity will be 1.8 million hens in aviaries but permitted to 2.9 million hens.  This facility will be at intermediate capacity in early 2017.
  •  Projects to the value of $160 million are under construction including expansion of cage-free and organic capacity in Kansas, Kentucky, Texas, Arkansas, Georgia and Florida.  The expansion in Utah will be dedicated to supplying California-compliant eggs from 620,000 hens.
  • For the 39 weeks ending February 27, 2016, net sales amounted to $1.606 billion compared to $1.173 billion for the corresponding period in 2015.  Gross margin was 37.8 percent (24.4 percent, 2015).  Operating margin attained 29.4 percent (14.4 percent, 2015) with a profit margin of 19.7 percent (9.8 percent).  The Company generated a net income of $316.4 million for the 39-week period compared to $115.1 million during the three quarters of 2015.  Earnings per share rose by 174 percent to $6.54 compared to $2.38 for the 39 weeks ending February 28, 2015.  The marked improvement in sales and net income is attributed to higher unit values occasioned by the disparity between supply and demand during the period. This was a direct effect of the 2015 outbreak of highly pathogenic avian influenza which reduced the number of hens in national flock by approximately 32 million but the epornitic did not affect Cal-Maine flocks.
  • The weighted average unit value attained for the 39 weeks of 2016 was $2.01 per dozen compared to $1.54 per dozen for the 39 weeks of 2015.  The premium associated with the shortage of shell eggs represented a 30.5 percent increase in weighted average unit selling price for specialty and generic eggs combined.
   
 

Status of 2016 Corn and Soybean Crops

Apr 27, 2016

    

The USDA Crop Progress Report for Monday April 25th indicated a continued favorable trend in planting in 18 states, expressed in the percentages in the table below:-

                                                                     WEEK ENDING
Crop                               April 17th                   April 24th                    5-Year Average

Corn planted                      30                                13                                    16
Corn emerged                    -                                    5                                      4
Soybeans planted               -                                     3                                     2

  

The prospects for corn and soybean germination and early growth depend on adequate soil moisture. USDA reported data for 48 contiguous states which does not differ materially from 2015, as shown in the table below:-

 

                          Moisture Classification (%) for Week Ending April 24th.  

                V. Short                     Short                     Adequate                  Surplus
Topsoil       4                              13                             70                             13
Subsoil       3                              14                             73                             10

   
 

 McDonald’s Corporation Reports on Q1 of FY 2016

Apr 27, 2016

    

In a press release dated April 22nd McDonald’s Corporation (MCD) announced results for the 1st Quarter of Fiscal 2016 ending March 31st 2016.

The release marked the 51st year since the IPO of MCD. The Company exceeded estimates of $5.8B revenue and EPS of $1.16.

   
   
 

CME Prices

Apr 27, 2016

    

At the close of trading on April 22nd CME quotations for corn, soybeans and soybean meal with values for April 16th in parentheses were:-

COMMODITY
Corn (cents per bushel)                          May   371.2   (377.2)            July  374.6     (380.6)
Soybeans (cents per bushel)                 May    984.0  (954.0)           July   993.6    (963.0)
Soybean meal ($ per ton)                       May    310.8  (295.4)           July   313.1    (298.3) 

  

 Note:

  • 30 cent per bushel (3 percent) increase in July soybeans.
  • $15/ton (5 percent) increase in July soybean meal.

For each 10 cent per bushel change in corn :-

  • The cost of egg production would change by 0.45 cent per dozen
  • The cost of broiler production would change by 0.25 cent per pound live weight

For each $10 per ton change in the price of soybean meal:-

  • The cost of egg production would change by 0.40 cent per dozen
  • The cost of broiler production would change by 0.25 cent per pound live weight

See posting on the April USDA-WASDE Report for an update on quantities and prices of commodities

   
 

Vegan Egg Substitute from Sioux Natural

Apr 27, 2016

    

Nutritional Outlook on April 21st reported on a plant-based substitute for eggs in baking applications. 

The product is prepared from soy flour and soy protein isolate and rice and can be incorporated into cookies and breads. 

The president of Sioux Natural, Paula Persinger noted “gluten-free Veggan® is a natural choice for people wishing to avoid animal products, allergens and GMOs.

The product indicates the ease of replacing eggs in some baked items but not in confectionary where the functional properties of eggs contribute to quality. Veggan® from Sioux Natural will compete with Hampton Creek products which are also based on plant proteins.

   
   
 

Challenge to Massachusetts Petition 15-11

Apr 27, 2016

    

Massachusetts voters may not have to decide on proposed ballot initiative Petition 15-11 which closely follows California Proposition #2, enacted in 2008. 

The petition is opposed by an advocacy group representing households receiving Supplemental Nutrition Assistance (SNAP) formerly termed “Food Stamps”.

  

At issue is the inevitable increase in the price of eggs, pork and other products derived from livestock.  The increase in the cost of eggs in California following the 2012 introduction of Proposition #2 promoted by the HSUS is now referred to as the “Pacelle Tax “ The aftermath of the California situation which deprived consumers of choice is advanced as a reason to reject the petition.

A legal complaint recently filed maintains that the petition violates Article 48 of the Massachusetts Constitution which requires that petitions deal with only one subject answerable as a simple affirmative or negative.  If ruled unconstitutional the initiative will not appear on the November 2016 ballot.

   
 

H-E-B Will Convert to Cage-Free Eggs

Apr 27, 2016

    

H-E-B is following the national trend by announcing conversion to cage-free sourcing of eggs with a target date of 2025.  In a statement issued by the company it is evident that H-E-B will work closely with suppliers to ensure safety and welfare but at the same time stock eggs which are affordable for Texas families many of whom receive SNAP benefits .  The company recognizes the cost involved in transition to cage-free systems. H-E-B places emphasis on an adequate supply, sufficient consumer demand and realistic pricing as important considerations in the transition. 

  

It is noted that Cal-Maine Foods with extensive installations in Texas recorded 9.5 percent of sales value to H-E-B in 2015 amounting to $158 million.  Assuming a relatively high average value of $1.90 per dozen which pertained in 2015 due to outbreaks of HPAI in the Midwest, it can be calculated that H-E-B purchased 83 million dozen from Cal-Maine Foods, their principal supplier.

   
 

Derreck Nassar Joins Eastern Quality Foods

Apr 27, 2016

In an April 21st press release Eastern Quality Foods of Ponte Vedra Beach, FL announced that Derreck Nassar previously with United Egg Producers will be joining their company.  In his new role he will focus on egg trading and sourcing for the existing international egg business of Eastern Quality Foods.

The company specializes in wholesale distribution of meat, seafood, eggs and other perishables to a client base comprising manufacturers, food service, retailers and institutions.  Founded in 1954, Eastern Quality Foods generates revenue in excess of $300 million annually.

  

In commenting on the appointment, Ted Rueger, President of Eastern Quality Foods noted “Derreck’s industry experience and relationships will be a true asset to our customers and complement our dynamic sales team.”  Nassar earned a BS in Agribusiness from the University of Georgia and a Masters of Business administration from the University of West Georgia.  He will continue to reside in Alpharetta, GA.

   
 

TWINPACK PROMOTES EGGYPLAY® PLASTIC EGG PACKS

Apr 27, 2016

    

TwinPack Special Products B.V. has introduced Eggyplay® egg cartons which double as a children’s building toy.  Constructed of durable polypropylene, the boxes can be washed and recycled as interlocking toy blocks which have gained a positive consumer response in Western Europe. 

Information and a promotional video can be accessed on the dedicated TWINPack site www.eggyplay.com.

  

   

Shane Commentary

 

Wal-Mart to Discontinue Wild Oats Brand

Apr 29, 2016

    

Wal-Mart Stores Inc. has announced that it will discontinue marketing the Wild Oats range of organic product which was introduced in 2014.  With a much-heralded introduction, Wal-Mart claimed that it could provide center-of-the store staples including pasta sauce at prices equivalent to conventional products.  The Wild Oats Brand was licensed to Wal-Mart in 2012 by Yucaipa Companies controlled by entrepreneur Ron Burkle of Los Angeles.  The brand was acquired when the Wild Oats chain of stores was acquired by Whole Foods Market but was spun-off in terms of an antitrust settlement. 

  

It is anticipated that Wal-Mart will begin sourcing organic products from a range of suppliers marketed under their Great Value private label.  Currently the sales of organic food attained $13.4 billion for the year ending April 2nd compared to all food sales valued at $468 billion for the same period.  The rate of growth in organic label products was 16.7 percent compared to 1.6 percent for all products according to Nielsen data cited in an April 26th article by Sarah Nassauer in the Wall Street Journal.

Laura Kennedy an analyst at Kantar Retail, a consulting group noted “Wal-Mart’s move to drop Wild Oats is an odd step to take when we know that they are trying to increase private-label penetration and trying to target the higher-income consumer.”  She added “If Wal-Mart was losing money to a middle- man this is not a time Wal-Mart would want to be losing anything.”

The reference to a middle- man calls to mind the relationship between Wal-Mart Stores and CCF Brands which serves as an intermediate between egg producers and Wal-Mart Stores.  The specific advantages associated with the intermediary have yet to be explained to the industry.  Surely Wal-Mart is capable of drawing up specifications and negotiating with suppliers concerning pricing, quality parameters and delivery schedules?  Either Wal-Mart Stores or CCF Brands are welcome to respond and justify their respective positions in what would appear from the outside to represent an anomaly in the supply chain. As Alice would say, “curiouser and curiouser!”

   
 

USDA-AMS Reports on Organic Compliance and Enforcement

Apr 29, 2016

    

The published appeals summaries posted by USDA-AMS for the reporting period January 2016 to May 2016 yielded 97 complaints with 93 completed reviews and investigations. 

The National Organic Program issued 6 cease and desist orders, 32 warnings and 16 investigative referrals. 

Two settlement agreements were concluded and civil penalties were imposed in some cases.

  

For the period October 2015 through December 2015, civil penalties amounted to $929,750 with 8 cease and desist orders, 22 warnings, 7 investigative referrals and 5 settlement agreements.

The question arises as to whether the administrators of the NOP are zealous in pursuing the integrity of the “organic” brand or whether they are picking the easy cases. There did not appear to be any action against large Asian exporters who have both the incentive and opportunity to cheat. They function in the absence of a structured assay program for contaminants and freedom from GM adulteration. A paper trail from China might be valid or it may be creative fiction.

   
 

Senator Stabenow “Justifies” Position on GMO Labeling

Apr 29, 2016

    

U.S. Senator Deborah Stabenow (D-MI) recently addressed food policy during her keynote address to the 2016 National Food Policy Conference held in early April under the auspices of the Consumer Federation of America. 

Senator Stabenow believes the food industry should be transparent and accordingly supports GMO labeling however “not in a way that penalizing food and agriculture businesses”. Despite believing in science and her conviction that genetically modified foods are safe, Stabenow wants it both ways! Although she purports to adopt an advocacy position regarding GM ingredients she effectively scuttled the federal Biotechnology Labeling Solutions Act S.2609 which passed out of committee in mid-April but failed to gain sufficient votes in the Senate to avoid cloture.

  

This was possibly the last chance to impose a federal standard to override the Vermont Act mandating labeling as to GM-content. It is ironic that a state with a population of 600,000 representing less than 0.3 percent of the U.S. population can impose its Ben and Jerry-like philosophy on the entire Nation. One characteristic of socialists is that they are ever ready to spend other folks’ money to advance their environmental, welfare and lifestyle proclivities.  In this they are abetted by wishy-washy politicians like Senator Stabenow and activists like Bernie Sanders. 

   

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Dr. Simon M. Shane
Simon M. Shane
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Industry Prices: Fri Apr 29
 Corn3.95 $/bu
 Soybeans10.08 $/bu
 Soybean Meal329.80 $/ton
 Eggs, Producer49  ¢/doz
 Eggs, Warehouse 59-62  ¢/doz