The widespread bird flu outbreak has threatened the food industry via a significant decline in the egg supply and steep rise in egg prices. Some food companies are struggling, some have been unaffected, and some are remaining tight-lipped.
Bird flu impact:
- The industry is seeing the first drop in egg production in the U.S. since 2008 after the deaths of 48 million birds thus far, including 40% of the egg-laying hens in Iowa, the country’s top egg-producing state.
- So much of the U.S. egg supply is in Iowa—one Iowa State University economist estimated that about 97% of egg capacity comes from about 1% of Iowa’s farms — and Iowa was also the hardest hit state in terms of number of birds lost.
Summer's hot temperatures temper the spread of the virus, which means fewer outbreaks, offering farmers some relief. Some of the earliest bird flu reporters now have the opportunity to restock their flocks and resume operations, which is good news for food companies harmed by the drop in their egg supply. Here's a look at the bird flu’s impact on the egg supply and food industry as a whole thus far.
Egg prices soar for food industry
While much attention has gone to increases in egg prices for consumers, less has been said about the price hikes for the food industry, namely the skyrocketing costs of breaker eggs, or liquid eggs. About one-third of all eggs in the U.S. become breaker eggs for use in liquid products and processed foods, and as of mid-May, the bird flu has reduced the breaker egg supply by about 23%, Enterprise reported. In May, when the virus infection rate peaked, breaker egg prices increased by 220% to more than $2 per dozen.
However, in June, USDA reported that egg prices were stabilizing while also estimating a 2% increase in production for 2016. USDA also predicts that while egg prices will remain higher than 2014, prices should decrease in the third quarter. They may, however, increase again in the fourth quarter for high-demand holiday periods.
As prices soared, demand and stock inventories fell. While egg-laying hen farms may bounce back relatively quickly over the coming months, the effects may be felt for longer by other parts of the food industry. This is particularly true for the companies that have to pay the high prices for eggs and breaker eggs to maintain production capacity. Interruptions in the egg supply chain have made it difficult for some food companies to continue to operate as normal, and several will feel the effects for a long time to come.
Food companies not so sunny-side-up
Hormel Foods Corp was the first large food company to announce that the bird flu had struck turkey supply farms for its Jennie-O Turkey Store brand.
As a result, Hormel issued more than 200 temporary job cuts at its Jennie-O plant in Minnesota in May with no set date as to when employees could return to work — the first time the bird flu led directly to job cuts. However, Hormel did say it would maintain its fiscal 2015 guidance for earnings, though those results would likely come in near the lower end of the $2.50 to $2.60 per share range.
Post Holdings Inc.'s Michael Foods Group, a supplier of extended shelf-life liquid and precooked egg products and eggs used in food ingredients announced in late June, that its company-owned Nebraska chicken farm was released from quarantine by USDA after initial tests that came up positive were proven to be incorrect. This enabled Post to change its estimation of 35% of its egg supply being lost down to only 25%. The company still expects about $20 million in damages to its full-year adjusted EBITDA due to the bird flu’s effects.
That's not all for Post, as Michael Foods is now suing Hawkeye Pride Egg Farms for allegedly breaching a January 2014 contract that has since disrupted Michael Foods’ egg supply. The disruption may have been because of the bird flu, but Michael Foods says "such harm will be irreparable," prompting the lawsuit to be filed in June.
Sysco Corp also announced in May that the bird flu's effects will limit its egg and egg-laying chicken supply for nine to 18 months, according to information from Sysco's suppliers. However, company spokesman Charley Wilson said it is "too soon to tell whether the supply squeeze will have a material impact on financial results," Reuters reported. Eggs represent only a small percentage of Sysco's dairy products segment, which made up 11% of Sysco’s revenue last year.
These are just a few companies navigating the flu's impact, but with so many food companies being dependent on eggs and breaker eggs, this could be just the beginning.
Companies remain tight-lipped on bird flu’s effects
Few other companies or egg suppliers have discussed publicly whether or not the outbreak disturbed their ingredient supply, production, or prices.
ConAgra Foods responded to Food Dive's interview request with the comment, "We have not experienced supply interruptions as a result of avian flu impacts and we do not anticipate them at this time."
General Mills responded to Food Dive's inquiry with a similar comment, "Like other companies, we have been impacted, but we are doing our best to work through the situation. To date, there have been no notable business disruptions."
Other requests for interviews with egg and egg product suppliers, including Michael Foods, were either not answered or declined.
While the summer months will slow the spread of the virus, no farm or food company is out of the woods yet. The worst is likely over for now in terms of contamination, but that's only until the weather begins to cool again in the fall — another source of concern for food companies.
Also uncertain is just how widespread and significant the effects might be on food companies in the coming months. Some companies have a large egg stock, but when that stock runs low, they will have to turn to a diminished egg supply that bears a high price tag, and that could noticeably affect margins going forward. Because that uncertainty exists, most food companies likely don't quite have a handle on the end results.
For now, key factors are the egg supply and prices, future bird contamination, and a potential vaccine from USDA.