Until the beginning of this year, egg and poultry producers had been doing well by historical standards. Now, amid feed price rises and continued deflation at retail, the clouds are gathering.
For some time, the poultrymeat and egg sectors have been seen as shining lights of profitability in the context of low producer returns across agriculture. Both have enjoyed strong demand for produce and suppressed feed prices – and the result has been a period of relatively high profitability.
But there are now signs that a period of higher feed costs could be beginning, while egg producers have already been hit by falling returns.
See also: Last year’s facts and forecasts report
The egg market in particular is now performing a delicate balancing act; not only with the overall level of supply, but the relative quantities of colony and free range.
Whatever hole the industry temporarily gets itself into, though, it can normally rely on growth in demand to pull itself out again in due course.
The main driver for this extra demand is population growth, linked in turn to the controversial question of immigration. Figures from the Office for National Statistics put the UK’s population at 64.6 million in mid-2014, with an annual average growth rate of 450,000 a year since 2010.
Most forecasts expect this to continue at a similar rate for the foreseeable future. With nearly half a million extra consumers every year, markets for staples such as eggs and poultry have a firm foundation on which to take an optimistic view.
In the short term, the egg sector has experienced increasing supplies on the one hand and retail price competition on the other.
These two factors are unlikely to go away. And now that feed costs are starting to rise from their unusually low levels, it is feared that tougher times could lie ahead for both free range and colony egg farmers.
Since the start of the year, wholesale prices for both colony and free range have slipped back to levels last seen three summers ago, in 2013.
Prices paid to producers have also dropped markedly in both sectors thin the past 12 months.
The big difference between then and now is the price of feed.
A layers’ ration was around £60/t dearer in early summer 2013 than it is now, but the gap has been closing. The average cost of feed is now about £30/t higher than as little ago as March this year.
Producer prices: While in the short-term free range and colony prices appear to move independently of one another, the long-term picture is somewhat different. Over a longer period of time incomes for the two systems move quite closely in tandem year-by-year, as the figures in the table bear out. This is a reflection that both are affected by changes in the longer-term fundamentals, such as overall egg output, demand and input costs.
Wheat is up by around £5/t in that time, but soya is the main culprit, having climbed £105 in three months.
Traders are already warning that a major upward movement in wheat cannot be ruled out sooner or later.
But what ultimately matters to farmers is how these changes in costs and returns are shaking down.
Because the price of poultry feed has been falling since 2013, retailers have been able to push down returns to fuel their sustained price war without inflicting any significant pain on the industry.
Free-range producer prices dropped on average from 105p/doz to 99p between 2013-2015, while the colony equivalent fell from 74p/doz to 64p/doz (see table).
Evidence that has not adversely impacted on producers is set out in the figures (point to producer price/feed cost chart), which chart the simple ratio of feed costs to producer prices in the free range sector.
According to this ratio, 2011 was the low point for profitability, with average annual returns increasing each year since then, rising from 0.35 in 2013, to a handsome 0.51 last year.
The figure for the first quarter of this year shows the first sign of the coming downturn, dipping to 0.49.
Although this is a healthy figure, it masks the real extent of the problem. It followed a sizeable drop in average producer prices to 87p/doz for the first quarter, down 12p/doz on the 2015 average.
With that, though, came a final bottoming out of feed costs, which in February and March dropped to their lowest level since 2009.
Since then, as mentioned above, the trend on feed has been sharply upward. When current feed costs are factored in at the same level as producer prices, the margin ratio drops right back to 0.42 – back to where it was in 2013.
It indicates that any further erosion of producer prices or rise in feed costs could really put poultry farm profitability under the cosh.
The headache for the industry is that if costs continue to rise, it may not be possible to achieve the price increases needed to cover them, given the background of fierce retail competition. Only a shortage of eggs could provide the necessary leverage, and that seems unlikely at present.
Growth in colony
The picture on supply levels is also confusing. There is widespread recognition that demand for free range is growing, and that colony is likely to decline, causing a structural imbalance within the industry.
It is true that free-range egg sales are expanding, but to date so are those of colony eggs, with figures suggesting they are expanding even faster than free range.
According to Defra figures, total egg output was up to a record level last year of 10.4bn eggs. This was 300m more than in 2014, and marks the third successive year of rising output since the 2012 downturn following the conventional cage ban.
After allowing for changes in imports and exports, including products, total consumption was up 460m.
It translates to a rise in per capita consumption of six eggs, from 183 to 189, even after taking in the growth in UK population of some 400,000 people.
The chart breaks down per capita consumption into three categories: cage/colony, free range (including organic) and barn.
It shows that consumption per head of free-range eggs has changed little since 2011, and that the considerable expansion since then has merely kept pace with the growth in population.
Colony consumption, on the other hand, has risen by 15 eggs per head since 2011, outpacing the population growth. It’s also worth noting that annual colony egg consumption is still around 40 eggs per person more than for free range, so the sector is still dominant in the UK.
It should be remembered, though, that free range is primarily a retail presence, while colony still dominates wholesale, catering and egg products, including the considerable quantities of imports.
Continued placings growth
Finally, the outlook for production levels remains high. The latest chick placings figures suggests the laying flock will continue at its current record size at least through to September.
In a tough market with feed costs increasing, producers can expect a testing run through to the end of the year.
The success story of Britain’s broiler sector has carried on for another year, buoyed along by rising demand, good margins and the protection of the Red Tractor scheme at retail.
This long-term expansion has continued through the first four months of 2016 (most recent figures run to April) and there is no sign that the popularity of chicken with consumers is starting to fade.
Turkey faces a tougher challenge to grow its market in competition with chicken, but its core business of Christmas, carveries and added-value products remains firm and consumption has remained steady for another year.
The main negative indicator for the poultry sector has been deflation. During the past year, for example, volume in the chicken sector was up nearly 5% but the value of the market barely rose. Average producer prices for broilers were down about 7p/kg deadweight from 2014 to 2015.
Until the end of last year, this had little adverse impact on producers.
The decline in feed costs had kept ahead of the fall in returns, so that a simple gross margin, in terms of the producer price to feed cost ratio, improved every year from 2012 to 2015 for both broilers and turkeys.
Feed costs have now begun to rise so, as in the egg industry, the challenge for the months ahead is to keep output in step with demand while coping with these rising input costs.
Again, as with the egg sector, rising demand underpins the longer-term outlook. Per capita consumption of all poultry made a jump to 29.9kg last year after five years of hovering around the 28.5kg mark (see direction tp come). Coming on top of growth in population, it stems from a 7% leap in total poultrymeat offtake in the UK in 2015.
Overall, consumption rose by 124,000t compared with 2014, and was achieved in two ways. There was a rise in total poultrymeat output of 46,000t, while net imports were up by 78,000t.
That trade picture is not as worrying as this appears; imports only rose by 31,000t, while actual exports dropped by 47,000t.
It effectively meant that consumption of home-produced poultry increased by 93,000t overall. In fact, imports as a proportion of home consumption dropped slightly compared with 2014, from 28.0% to 27.8%.
Within those figures, chicken consumption showed a sharp rise from 25.0 kg to 26.7kg per head.
Meanwhile per capita turkey consumption remained steady at 2.7kg, which is little changed since 2010-11.
The impressive growth of the broiler sector is the encouraging feature of the UK poultry industry. Commercial chick placings rose again in 2015 to reach 972 million, and the expectation is that the total will break the one billion chicks barrier during 2016, a significant milestone for the industry.
Latest placings figures for this year, up to April, suggest expansion has continued at a measured rate, showing a 1.1% rise compared with the first four months of last year.
Turkey placings have tended to be more up-and-down, rising by 300,000 last year after having dropped by around 1.5 million from 2012 to 2014.
Last year’s total was back to the level of 2010-11.
This year has started less confidently, with a year-on-year decline of about half a million birds during the January-April period.