8 March 2016
Bill Broody March 2016
Over lunch last Friday I read about continuing strong demand in the free range egg sector: “demand for free range eggs is continuing to soar, according to the latest market figures disclosed to the Ranger by Noble Foods”.
I also noticed several adverts by packers looking for new producers. At mid-afternoon I was telephoned to say Noble would be cutting the price on L & VL by 7p and M and below by 8p in 7 days time!
The reality of the price cut is that at 320 eggs per bird a reduction of c7.5ppd avg makes Noble producers £1.95 per bird worse off; for us that equates to a reduction of £23,400 on a 12,000 bird farm turning a modest profit into a loss making position. This is supported by the costings in the Ranger which demonstrate that only producers with low or no borrowings are likely to be making any profit.
I have learnt from other producers that this price cut will reduce Nobles egg price to a level comparable with the producers who entered the Tesco feed price tracker contract. I have previously voiced my strong opposition to the principles of the tracker contract and the impact it would have on the free range sector drawing on the comparable of the broiler industry. De-risking a business will inevitably lead to reduced margins, producer base consolidation and escalating scale. I have always feared that this will ultimately deliver fewer but bigger free range egg farms taking the production method further and further away from the consumer’s perception.
Many producers have ignored the warnings in the Ranger about the rate of expansion in the industry. To date this has been absorbed by bulk buy and price discounts funded by packers and retailers which has increased growth in the volume of our market but reduced its total value from £990 million to £793 million.
Packers and retailers ‘investment in price’ has shielded producers from the imbalance in the growth of supply and demand. Whether it is an unintended consequence of altruistic intentions or a calculated act by savy retailers, we are all now selling in an oversupplied market.
The price adjustment will hopefully stop further increase in expansion. In addition, some producers may be in a position not to restock sheds temporarily or permanently, however if a c.5% reduction is needed to bring equilibrium that equates to approximately 750,000 birds or 63 producers at 12,000 birds each. Therefore, I think it is likely the reduced level of margin will persist for some time.
The major retailer’s success in delivering shareholder value and low prices to consumers is dependent on their ability to squeeze lower prices from producers and packers along the supply chain. In response I believe that BFREPA should adopt a policy position delivered through all available channels that “further aggressive pricing competition between the leading supermarkets on free range eggs will force smaller producers out of business and make intensification of free range an inevitable fact.” I appreciate it is unpalatable to many but it is the truth.
Bigger producers with a lower unit cost of production may feel more isolated from the effects of the current margin reduction, but if the current trajectory of price competition between retailers continues then it is only a matter of time before 32,000 birds becomes unviable.
BFREPA is obligated to represent the interests of producers but that includes the interests of the sector and our consumer’s belief in how we farm free range hens.