Retail war pushes poultry producers into the red

The retailer price war has reached new levels, with the impending slow-down in consumer spending sparking fierce fighting over chicken and egg prices.

As the credit crunch hits consumers’ wallets, shoppers are increasingly switching to discount stores and cheaper ranges. Large supermarkets are, therefore, aggressively cutting prices, with Tesco reportedly calling for a 17% cut in the price of chicken.

Falling wheat markets have added to the pressure, and egg packers have been the first to succumb, slashing free-range prices by around 10p/doz. “That is a savage drop, and we are all reeling from it,” said Tom Vesey, chairman of the British Free Range Egg Producers’ Association.

He reckoned a £5/t drop in feed price equated to a 1p/doz saving. A 10p/doz fall in price should therefore reflect a £50/t fall in feed costs, but most producers had only seen a £20/t drop at the most. Producers were also still facing higher energy, fuel and pullet costs, which had not been taken into account, said Mr Vesey. “This price cut leaves us in the red. I am particularly concerned about the newer producers who are more highly geared, they will really be suffering.”

Many producers were stung by rising feed costs last year, and had therefore been encouraged to buy their feed forward, said Charles Bourns, chairman of the NFU Poultry Board. They were now locked into high-priced contracts, so were not seeing the benefit of reduced input costs.

“When costs went up the retailers were slow to put prices up, but now they’re coming back down they want to drop prices immediately. The supermarkets want cheap prices and some people are describing it like World War III out there.”

With massive investment required by producers in the coming years, some were deciding to cut their losses and cease production now, said Mr Bourns. “Most producers have broken even over the summer, but this could push them into making a loss. If the retailers want this price war, it should be done with their own margin, not the producer’s margin.”

Peter King, group PR executive at 2 Sisters Food Group, agreed that there would be a time lag before lower feed prices filtered through to the finished product. “There will always be robust discussion on how we can take costs out of the system, but we believe there is a very strong justification for a lag before prices come back down.”

Although some pundits had blamed a surplus of eggs and meat for the price pressure, meat sales were up almost 10% in value over the past few months, said Mr King. TNS figures showed that free-range egg sales were 16% up over the past three months, compared with the same period last year.

He expected to see real feed costs drop back in the New Year. “The government wants to see deflation in food and we believe that deflation needs to be passed back to the customer in order that they continue to buy chicken.”

The Great Rip-Off?

Supermarkets were “ripping off the public”, according to one free-range producer in East Devon. His packer recently cut his egg prices by 10p/doz, leaving the business running at a loss. “Meanwhile shop prices remain high at £1.52p/half doz, from which the producer only receives a pitiful 42p. This is neither fair nor profitable.”

While the public thought free-range eggs were expensive because of the method of production, most of the money went to the retailers’ and packers’ “outrageous profits”, he said.

Retailers took 15 months to compensate for last year’s doubling in feed costs, and the 8p/doz increase was barely enough to cover the feed rises, let alone other increases in production costs, he added.

Encouraged by his packers, he entered into a long-term fixed price feed contract to protect against the volatile wheat market.

“Then earlier this month the feed prices started to drop and the immediate reaction was to drop the price paid to us by 10p p/doz.” This would leave the business running at a loss of up to 60p/bird, he said. “Should we have to go to these lengths while supermarkets rake in the cash?”

The producer asked not to be named for fear of losing his contract.