The quarter that ended Feb. 29 was dismal for Cal-Maine Foods.
The nation's largest producer and distributor of fresh shell eggs, which is also publicly traded, saw sharp drops in sales — down 10% — to $345 million, compared to the same period the year before. The company's net income dropped 65% in the quarter compared to 2019, down to $13.7 million from $39.8 million a year ago.
“Our results for the third quarter of fiscal 2020 reflect more challenging market conditions than we experienced for the same period last year," Chairman and CEO Dolph Baker said in the release that accompanied the earnings report. "...While our sales volumes were in line with last year, our overall sales revenue was down due to the lower average selling prices compared with the same period of fiscal 2019."
Baker predicted more volatility in egg prices for the year, likely because the earnings report came out on March 30, as the coronavirus pandemic was just starting to keep people at home. Consumers were buying up pantry and refrigerator staples at grocery stores across the United States, and eggs were becoming a scarce commodity — at least on store shelves. The week that Cal-Maine's earnings report came out, the USDA's weekly National Retail Report for shell eggs and egg products showed the retail price of a dozen large eggs was $3 — more than double the $1.32 price from a week earlier.
Eggs — much like oil, gold and wheat — are a commodity priced on a complex index that takes into account supply, demand and valuation by traders. Urner Barry, a business publisher that reports daily market news, publishes the baseline egg prices that the industry uses to sell eggs.
Brian Moscogiuri, Urner Barry's marketing director who covers the egg and egg product markets, told Food Dive the higher prices at that point were mainly driven by consumer demand. He compared consumer behavior at the beginning of the pandemic to that when a blizzard is coming toward a town.
"It's kind of acting like a national snowstorm, where everyone is getting the same forecast," he said. "Everyone knows it's going to impact them for a very, very long period of time, and they're going to be stuck in their houses for maybe longer than they ever have. So eggs are one of those items, along with toilet paper, ... paper goods, cleaning products, etc., because of the nature of what we're going through, that have really cleared off the shelves."
But after a few weeks of bare shelves and sky-high prices — and lawsuits and consumer complaints resulting from them — refrigerated cases at grocery stores once again had stacks of egg cartons. Prices started falling, returning to $1.18 in the same USDA report on May 29.
Why all of the price volatility? What caused these fluctuations? And will the prices stay where they are? Maro Ibarburu-Blanc, associate scientist and business analyst at the Iowa State University Egg Industry Center told Food Dive the industry is extremely complicated. And volatile. Half of the time, he said, egg prices fluctuate 5% or more from week to week.
"It's not unusual to have big changes because the demand changes very, very fast, and the supply cannot keep up with that pace," he said.
How does the egg market work?
From an outside perspective, the egg market can look pretty simple.
On the inside, it's much more complicated.
For starters, there's more to eggs than the whole shelled form bought in cartons at the grocery store. Ibarburu-Blanc said only 69% of eggs that are laid in the United States are shell eggs — sold in cartons either to grocery stores or foodservice outlets. The rest are breakers, sold in liquid form mainly to foodservice. Shelled eggs — which are further broken down by size, grade and specialty markets — all have wholesale and retail prices set on the Urner Barry index. Liquid eggs also have a distinct price.
Then there is the matter of egg supply. Matt Sherman, the chief marketing officer of pasture raised organic egg producer Handsome Brook Farms, told Food Dive that much of the egg business is run like an agricultural version of Big Food: a mass producing industrialized machine that is pushed to produce as much as possible.
"But you can't get the chickens to work a third shift," Sherman said. "It's not quite the same as actual manufacturing."
Chickens can lay about an egg each day, so increasing supply means increasing flocks. When there is a spike in demand, it takes some time to be able to make more to fill it, so supply is relatively steady. According to April's monthly statistics from the Egg Industry Center, there were 330.6 million egg-laying hens in the U.S. as of April 1 — 3.5% less than last year. On any single day, about 81 out of 100 hens produce an egg.
Last year, according to the United Egg Producers, hens in the U.S. laid a grand total of 99.1 billion eggs, an increase of 3% over 2018. But in March, according to the Egg Industry Center, egg production was 17% below the 2019 baseline for the year, at 600.2 million.
These are unequivocally big numbers. And that means that even small changes on the demand side actually result in more large numbers that need to be produced. Marc Dresner, director of marketing and communications for the American Egg Board — the checkoff program for promoting the industry — said that eggs are in more than 90% of homes in the United States on a regular basis.
"If you increase demand for a product, a staple product like that, by even 1%, you're talking about a tremendous number of eggs," Dresner told Food Dive. "...Year over year, we have been increasing around 2% annually."
But there's another wrinkle to all of this. Eggs bound for foodservice have different inspection and labeling requirements, and are sent out in much larger quantities. While foodservice demand has been low since many dining rooms have shut down, those eggs couldn't just be shifted to fill the increased demand at the grocery store. The FDA made a temporary allowance for those eggs to be redirected to retail, but that came on April 6, after consumers found high prices and empty shelves.
And that did correct the retail price issue. According to the USDA's National Retail Report that came out on April 10, the price for a dozen large grade A eggs was 95 cents a dozen.
Priced too high?
The run on eggs and price spike was unexpected considering the recent history of the egg industry.
In general, the industry was finishing up a few not-so-profitable years. But that wasn't due to lack of consumer interest in eggs. In 10 years, per capita egg consumption increased from 248 a year in 2009 to 290 last year, according to USDA statistics posted on the United Egg Producers website.
Moscogiuri said that the low sales posted by Cal-Maine earlier this year represented a bigger issue the egg industry had: oversupply. During the last several years, retailers and restaurants have been making commitments to transition to cage-free eggs.
"Because of those commitments, producers have been adding in more cage-free production," he said. "Well, they haven't necessarily been removing conventional production 1-to-1, and that's created a big increase in overall production over the last few years. ...The last year and a half, prices were very low because of the overproduction."
As soon as prices began to spike, consumers went to state officials, many of whom had announced they would be tough on price gouging during the pandemic. Prices had doubled in a week, and eggs had suddenly become harder to find than toilet paper or hand sanitizer.
"You can't get the chickens to work a third shift. It's not quite the same as actual manufacturing."
CMO, Handsome Brook Farms
The Texas attorney general's office filed a lawsuit against Cal-Maine Foods in late April, asking the court to stop the company from selling eggs at too-high prices.
"On information and belief, Cal-Maine has not experienced any supply issues or other disruptions that are driving it to charge more for eggs," the lawsuit says. "It is simply charging more because it can, or, more specifically, because the pandemic caused market demand to jump. In summary, Cal-Maine is taking advantage of a disaster by offering for sale, and/or selling, eggs at exorbitant or excessive prices."
Cal-Maine denied the accusation in a written statement, and Cal-Maine spokesman Jeff Eller also sent a further denial in an email to Food Dive.
"Since 1958, we have operated with honesty and integrity," Eller wrote. "We are steadfast in our belief these charges are grossly unfair and without merit. The domestic egg market is intensely competitive and highly volatile. For decades, we have priced most of our sales off an independent, third-party market quote published by Urner Barry Publications, Inc. We have no control over this market quote and it fluctuates wildly from week to week and sometimes day to day. We have been consistent in our pricing practices whether we sell at a profit or at a loss."
The state of Minnesota also took action against Forsman Farms, a family-owned producer in the state, for potential price gouging in late April. According to a March executive order, any consumer good price that increased more than 20% from what it sold at pre-pandemic could be seen as gouging.
“We found that some egg producer supply prices had nearly tripled because pre-existing contracts tied egg prices to a market index. But supply contracts are not exempt from the prohibitions in the price-gouging ban,” Minnesota Attorney General Keith Ellison said in a press release.
Instead of fighting, Forsman Farms decided to settle with the state. According to the settlement document, Forsman Farms denied price gouging, saying it set its prices using the Urner Barry index, which is set by commodity market forces it does not control. Nonetheless, the company retroactively reset its prices to a lower threshold, changing invoices and offering refunds to retail customers. As the pandemic continues, if there is a reason that egg prices must go higher, the document states the company can only raise its prices in Minnesota with written permission of the attorney general's office.
The settlement does not by itself serve as an admission or denial of liability by Forsman Farms, but the producer could be subject to a $75,000 civil penalty if it violates the agreement.
Ibarburu-Blanc said that in general, egg farming is not lucrative right now. Producers actually lose money — last year in the shell egg market, producers lost about 2.7 cents per dozen eggs. He said that perhaps the short-lived boost in market prices helped compensate for some of those losses, but it was short lived.
He didn't know specifics about any of the gouging accusations, but said it is unlikely the producers were taking unfair advantage of the situation.
"It's the same marketing strategy and contract that they were using last year when they were losing money," he said. "I don't see that anything changed more than a shift in demand, and these shifts in demand are pretty common."
Breakers are broken
While prices on the shell egg market have largely been able to return to normal, liquid eggs — known as breakers — are still suffering.
Breakers are primarily sold to foodservice, where operators will use large quantities of liquid eggs to make various egg dishes for customers.
And egg operations that produce breakers are also pretty specialized. Often, the eggs that are laid go directly into machinery that automatically breaks them and saves the liquid, Moscogiuri said. It's a fairly difficult process to change, and breaker producers have kept going with their liquid. Hens are also restricted to the liquid egg market when they're more than 45 weeks old, Ibarburu-Blanc said.
In normal times, breakers sell easily. But in times like these, with few foodservice dining rooms open, it's much more difficult to sell them. Ibarburu-Blanc said the quick shutdown of these outlets due to the pandemic killed the whole market for liquid eggs in a week.
While demand screeched to a halt, there was little that producers could do.
"We're dealing with live animals, and so you can't halt production," Dresner said.
"It's not unusual to have big changes because the demand changes very, very fast, and the supply cannot keep up with that pace."
Associate scientist and business analyst, Iowa State University Egg Industry Center
Some producers have worked to dry the liquid eggs into powder, which has a longer shelf life and takes up less space, but there is only so much market for dried eggs, which are used by some manufacturers.
So while consumers searched for shell eggs at their grocery stores, liquid egg producers searched for a market to sell their products.
"The liquid egg price went to 8 cents a pound," Ibarburu-Blanc said. "Out of curiosity, I compared with a gallon of water at the supermarket, and the gallon of water was 9.6 cents per pound. The egg prices went so low. My estimate is that it costs about 22 cents just for the feed — you know, the corn and the soybean — without considering any utilities or the labor or the processing side, they didn't even cover half of the feed at that price."
Even at such a low price, Ibarburu-Blanc said, producers struggled to find buyers for their liquid eggs. They couldn't donate them to food banks because the containers the eggs are in are very large and difficult to partition. Liquid eggs don't work well for feeding swine or cattle, either.
"They were even looking at discarding the eggs because they even with this lower price, they couldn't find enough takers," Ibarburu-Blanc said.
Some of them have found their way to grocery store shelves. While a small number of short containers of liquid eggs have been a refrigerated case staple, today's egg section in many stores is filled with tall cartons of liquid eggs, with producers hoping consumers will pick them up.
Sunny side up?
After prices, supply and demand have seesawed to extremes in the last few months, what are the prospects of things calming down for the egg market?
"That really depends on demand," Ibarburu-Blanc said. "Demand is a stronger force than supply for eggs."
Rebuilding the demand — especially for the liquid egg market — relies on reopening dining rooms for foodservice, he said. Either those eggs will need somewhere to go, or producers may face difficult decisions about whether to cull their flocks.
But the shell egg market is also subject to big changes. Consumers have had a plethora of different choices for eggs, in terms of animal welfare and treatment. There are cage-free eggs, which cost consumers more. Then there are organic eggs, as well as pasture-raised eggs.
Handsome Brook Farms is the leading producer of organic pasture-raised eggs in the U.S., and a dozen of its eggs generally cost about $6. It does not use the Urner Barry index to price its eggs, and the cost to retailers and consumers is relatively stable. CEO Jordan Czeizler told Food Dive it's a good time to be in the specialty eggs business. Handsome Brook has seen 85% growth since 2016, he said, and has been increasing steadily every year. This year, he is expecting 25% to 30% growth year-over-year.
"Typically egg products thrive during really strong economic times, but, you know, the economy's been flipped on its head."
Egg marketing director, Urner Barry
Much of that growth is expected to come from consumers who are discovering the specialty egg brand. Czeizler said that at the height of the egg shortages, they didn't get many new customers who were looking for a carton of eggs at any price. While they sold more than expected in that period, he said it was mostly their customer base hoping to stock up.
Sherman said Handsome Brook's normal customer is someone who is concerned with values, like where their eggs come from, how their chickens were raised, the way the chickens were cared for.
"You are willing to pay more for something that shares your values — better for the environment, better for nutrition, better for farmers, whatever those values are," Sherman said. "And we're hoping that as the recession evolves, those value shoppers are willing to speak to their values."
But the recession may put a damper on growth for specialty eggs. Many promises to switch to specialty eggs — like cage-free — came from foodservice entities, Moscogiuri pointed out. Considering the drop in foodservice activity, there may actually be less demand for them — and a change in the mixture of egg products available to consumers.
"Typically egg products thrive during really strong economic times, but, you know, the economy's been flipped on its head," Moscogiuri said. "The consumer will typically will go toward shell eggs, less value-added products, more affordable protein sources. And shell eggs do really well during economic downturns. We saw that during the [last] recession.
"But as this thing plays out, we don't know how long it's going to play out and we don't know what kind of demand environment there's going to be for egg products coming out of this. So the processors are looking at just trying to balance their own supply with their demand, which has been completely changed overnight."