Oversupply sends egg prices to their lowest in a decade

It doesn’t matter if you like them hard-boiled, scrambled or soaked in hollandaise sauce, when eggs are this cheap, it’s a good time to get cracking.

Supplies in the U.S. have surged so much in recent months that prices are the lowest for this time of year in at least a decade. It will probably take a while for consumers to eat through the surplus inventory, so the government is predicting egg costs will drop more than any other food group in 2017.

Indiana is the nation's second largest state for egg production, with about 32 million egg-laying chickens, trailing Iowa with 53.4 million and ahead of Ohio with 29.7 million.

The slump marks a sharp turnaround in the egg business. In 2015, an avian influenza outbreak forced farmers to destroy millions of birds and prices skyrocketed. Eager to take advantage of the rally, producers expanded flocks that were the biggest ever by the end of last year. But demand hasn’t keep pace. While some farms have scaled back in recent months, hens have gotten more productive, keeping the market flush with supply.

"The market was temporarily starved for eggs, and now it’s drowning," said Tom Elam, president of Carmel-based consulting firm FarmEcon LLC. "There’s just too many eggs out there.”

Price plunge

Retailers were charging $1.414 on average for a dozen eggs in May, the lowest for the month since 2006, Bureau of Labor Statistics data show. Prices have plummeted 52 percent from a record $2.966 reached in September 2015. Costs are on track to fall by as much as 6 percent this year, the U.S. Department of Agriculture forecasts. The decline comes even with overall food inflation projected at as much as 2 percent.

Total egg supplies in the U.S. will climb 1.3 percent in 2017, to 8.829 billion dozen, the government said in a June 9 report. That’s the highest in data going back to 1992. Output is projected to rise again next year, with total supplies forecast at 8.957 billion dozen, the USDA estimates. The vast majority of supply is domestically produced.

The glut has been a drag on Cal-Maine Foods Inc., the nation’s largest egg company. Shares have slumped 12 percent in 2017, the worst start to a year since 2009. Adam Samuelson, an analyst at  Goldman Sachs Group Inc., downgraded the recommendation on the stock to sell from neutral on June 16.

"Historically, the egg industry has experienced many boom and bust cycles with periods of overproduction disrupting the supply-demand balance," Cal-Maine Chief Executive Officer Adolphus Baker said during a presentation earlier this month.

Impact of low prices

The current slump may not last, Baker suggested. “High prices cure high prices” by encouraging more supply, “but low prices also cure low prices” by forcing producers to cut back, he said.

In response to the market rout, production has been cut at Mentone-based Midwest Poultry Services LP, a family owned company about 115 miles north of Indianapolis with 10 million laying hens on five farms that normally produce about 160 million dozen eggs annually.

“This year, the first six months have been disastrous,” said CEO Bob Krouse, a 34-year veteran of the egg industry. He declined to say how much he’s reduced output. “It’s just a good reminder to everybody that this is a cyclical business.”

Nationwide, farmers have reduced their flocks by about a million birds a month this year, dropping to 371 million as of June 1, from about 376 million on Jan. 1, USDA data show.

Another bright spot for producers is that demand is expected to pick up before the end of the year. Consumers tend to eat more hot breakfasts that include eggs after the weather turns colder. At the same time, holiday cooking and baking also helps boost consumption, which usually increases around Thanksgiving, according to Elam of FarmEcon.

Productive hens

But for now, farmers aren’t reducing their flocks fast enough to have a major impact on prices, Elam said. At the same time, even with smaller animal numbers, egg production is rising because the hens are younger and genetically more productive, said Knox Jones, a dairy analyst at Advanced Economic Solutions.

As of June 1, 100 hens produced an average 77.1 eggs per day, the USDA said in a June 23 report. That’s up 1 percent from 76.3 a year earlier.

Adding a further drag on prices, the industry-wide move to increase cage-free production is limiting farmers’ ability to trim flocks. By 2050, as much as 75 percent of output will be cage-free, up from about 14 percent now, Jones estimates. The move comes as companies such as McDonald’s Corp. have pledged to move to cage-free eggs to meet growing demand from consumers focused on animal welfare.

Premiums for the product could also start to disappear as they become more the norm, Jones said.

Farmers are “unprofitable right now, but they find themselves in an awkward situation,” Jones said. They should be producing less to ease the glut, but they also need to be expanding their flocks of cage-free animals, he said.