Free-range egg producers supplying Noble Foods have the chance to lock into a new feed-linked pricing contract, offering more stable margins for the next four years.
“The principle of reflecting feed costs movements in the price of eggs has long been debated,” said farms manager Tom Willings. “Until now, the risk of volatile commodity markets has been at the door of the primary producer.”
With feed representing up to 70% of the cost of production, sudden hikes in grain prices, as happened between 2010 and 2012, can have a devastating effect on any egg business.
But negotiations between Noble and leading retailer Tesco have culminated in a long-term supply agreement, linking the price of eggs to commodity markets. “As such, we’re now able to offer free-range producers a contract with a simple egg price mechanism that directly reflects their monthly feed price.”
The contract is voluntary and is being rolled out on a first come, first served basis. But after just two weeks, over half of the volume required to meet the Tesco contract has already been signed up.
The system works by taking the price of the Layer 1 diet supplied by Noble’s feed mills on the first of each month, using 1 March as a benchmark. For every £5/t increase or decrease in that feed cost, the producer’s egg price will move up or down by 1p/doz.
“The contract, which runs until February 2019, is effectively an insurance policy offered to all free-range producers at a discount of 2.5p/doz against today’s egg price. Thereafter, feed and egg prices are directly linked, so fixing the producers’ gross margin,” said Mr Willings.
“Obviously we appreciate that every business is different, with different pressures and different attitudes to risk. It won’t be an option that appeals to everyone.
“But there is every chance that there will be some sharp cost inflation at some point in the next four years. As with the dairy industry, these models insulate the producer from such volatility. We believe it’s a tremendous step forward.”
Tesco head of agriculture Tom Hind described the new arrangement as “an important and significant step in strengthening our relationships with producers”.
“Commodity market volatility is a challenge for our customers, for Tesco and our producers,” he said. “Through developing a mechanism that reflects variable production costs in the prices we pay our egg suppliers, we’re better able to manage this risk together.”
Once fully subscribed, it is estimated that about a third of Noble’s free-range suppliers will be on the new contract.
Other packers are known to be working on similar models.