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The egg industry was very different to the dairy industry, said Stonegate’s Richard Kempsey when he was asked whether there was any danger that egg producers could suffer the same financial problems as dairy farmers in years to come.

Richad Kempsey

The issue arose during a talk by Richard at the Pig and Poultry Fair this month. He delivered the talk – ’So you think you want to go into poultry’ – on both days of the fair and each time the audience was packed with prospective egg producers. At the end of his presentation, Richard was asked by one member of the audience whether there was a chance of the egg industry going the same way as the dairy industry, but he said the way the egg industry was run was very different from the dairy industry.

Dairy farmers have had severe difficulties as a result of very low prices paid for their milk, but Richard said the structure of the egg market was not like the dairy industry at all. Richard said the egg industry was run by marketeers who were able to see the demand for eggs at any one time and were able to schedule supplies to meet that demand. That was very different from the dairy industry, he said.

Richard did say during his talk that there had been a huge increase in the number of people going into free range egg production over the last couple of years. Free range currently accounted for 42 per cent of the egg market in the UK and some people thought there was a huge opportunity for expansion. He did no think that was the case. "Although we have got steadily increasing demand for free range eggs, particularly from the processing market, there is huge interest – and I think that is highlighted by the number of people in this room - and there has been a huge number of enquiries over the last two years. We have a stream of producers who are now locked into our schedules for the next two years. We are getting close to the point when we say that is it, the stable door is closed and we don’t need any new production going forward."

He said it was vital for anyone thinking of going into free range egg production to talk to someone first to determine whether they could market their eggs. They had to assess the market before they did anything else, speak to packers or marketeers and check and double check the figures before going ahead with any investment.
During his talk he outlined some typical costs and possible returns from egg production. He told the audience that feed and labour accounted mainly for the differences in costs between the different types of production. The cost of production on an enriched cage system was 5.5 per cent higher than that on a conventional cage system, he said. The cost of free range production was 30 per cent greater than value egg production. "Remember this because we have to market it to the consumer. It is not surprising that in a credit crisis that they drop back to a lower value product if it is available on the shelf."

He said existing cage production was currently being ripped out because of the impending EU ban on conventional cages – which comes into effect in January 2012. "All enriched cage production – or 95 per cent of it – is new investment. A lot of that is on borrowed money and people want a real rate of return on the money they have borrowed. That, I think, is going to put a floor in the market as we go forward, provided there is no over-expansion on the enriched cage side. I don’t envisage that. I think there will be a temporary problem in trade whilst we go through this transition, but in terms of cost most definitely I think there will be a raised expectation from producers in terms of the cost of production and the rate of return they are wishing to accept for that production."

He said, "You have got almost the reverse on the free range, I am afraid, and it is a negative in the story in that it is all outside production, they are small type producers and we have enough supply going forward. So there we have to very much watch what the supply and demand actually is."

Richard said there was now a degree of separation in the free range egg market. That separation was between a premium egg and standard free range production that would supply the normal free range offer. On top of that, most growth in free range was in processing. "Last year the first processing contract on a free range unit was taken forward for a year – so dedicated flocks for processing," he said. "That is a sign of where the market is going."

Whilst pointing to the growth in demand from processing, he said that Stonegate supplied the majority of eggs going into Waitrose. The company’s Colombian Black Tail producers aimed at the premium end of the market. He also spoke about on-farm developments to reduce the use of energy and address the issue of carbon footprint. He illustrated this by referring to a 2,000 bird unit in the Scottish Borders that used wind and solar power and LED lighting. LED lighting could reduce energy usage by at least 60 per cent on such a unit, he said.

"I have just come away from a meeting with Waitrose and carbon is being discussed. I would say that for the whole of agriculture going forward carbon is an issue. It is part of our differentiation in what we are doing for Waitrose. You can see that we are starting to get polarisation into the premium extremes."

The figures he outlined to the audience were taken from a standard free range unit with 12,000 birds. He pointed to an annualised margin per bird of £3.05. He also pointed to a return on capital of 12.7 per cent, which he said was quite a high figure for agriculture. "It is probably why we get the enquiry level we do into the egg sector," he said. "We want to operate on that sort of level. We think it is sustainable and sustainability is a very big issue for UK farming." He said the aim set by the previous Government was to double agricultural output by 2050.

He did reiterate, however, that anyone looking to go into egg production should study the market very carefully, seek advice and speak to packers before committing themselves to investment.
Farmers had to be sure there would be a market for their eggs before making the commitment.