Ep. 18 Highly-Pathogenic Avian Influenza Impacts on Egg Markets

[00:01] Intro/Outro
Welcome to Relevant Risk from the Fryar Price Risk Management Center of Excellence presenting conversations and Analysis about Risk and Risk Management for food and agriculture, supply chain decision makers from farmers to consumers and everyone in between. This is Relevant Risk.

[00:20] John Anderson
Hello, this is John Anderson, director of the Fryar Price Risk Management Center of Excellence at the University of Arkansas. Here with another Relevant Risk podcast, and joining me today, Jada Thompson, assistant professor of agricultural economics. Jada how are you today?
 
[00:35] Jada Thompson
I’m great and ready to talk about some great risk things today.

[00:39] John Anderson
Yeah, absolutely. So, Jada, I was thinking about this today as I was driving in. You know, I spent my career as a livestock market economist, and two things I can always count on is that around Thanksgiving, I was getting a lot of questions about turkey prices. And in more recent years around Super Bowl time, I was going to get a lot of questions about wing prices, but I don’t think in all my years I ever really had anybody call me up and ask about egg prices.

[01:09] Jada Thompson
I mean, same you know, I’ve been kind of a poultry economist for the past seven years, and this is the first time I’ve ever had somebody call me up and ask me why egg prices are the prices they are.
 
[01:18] John Anderson
But this year, everybody’s talking about egg prices. It is probably the hottest topic in Ag markets right now. What is going on with egg prices? I mean, egg prices for years kind of knocked around, you know, a buck/buck and a half a dozen, fairly routinely and not a whole lot of action there. But that’s not the case right now. So, give us a little overview, give us a little context. Where are egg markets right now and how does that compare kind of to what we sort of have thought about as normal historically?

[01:46] Jada Thompson
Yeah. So normally, you know, eggs are a buck, you know, a buck, two bucks, even for a dozen grade A large eggs. December prices were $4 to $5. And you’re talking about parts of the U.S. where they’re as high as $6 to $8 a carton. And so, when consumers are looking, there’s a little bit of a sticker shock. And that’s for a lot of factors that assume we’re going to talk about in a minute. But, you know, when you’re looking at the grocery store where it’s a baseline product that’s going to be in my basket every week. It’s good that I know roughly how much I’m paying and all of a sudden, it’s tripled in price potentially from what I’m expecting, especially during like a time of high demand season. You know, it’s a pretty substantial issue and I think that’s why there’s so much chatter about it.

[02:30] John Anderson
Right. So, it is something that has gotten everyone’s attention and the questions that have come up is, okay, what’s behind this? Why are eggs so expensive? And there are a few factors going on, but what do you think are the highlights there?

[02:43] Jada Thompson
Yeah, So, you know, again, everyone sees the prices and they wonder why they’re high. And first and foremost, we have to talk about highly pathogenic avian influenza, or bird flu commonly called, first and foremost, because you can’t talk about high prices without thinking about supplies. You know, we’re economists and we talk about supply and demand, and we can’t have this, you know, we have this demand and if all of a sudden prices are up, that means supply is down typically. And so, we’re going to talk about inflation, we’ll talk about feed, we’ll talk about transportation or seasonal demand. But let’s start with bird flu, because I think that’s, you know, one of the larger drivers of these prices right now. And, you know, we had a different Relevant podcast, where we talked about bird flu earlier in the year and we talked about the market impacts and the prices at the time. And one of the things with this particular strain is it’s been ongoing. It hasn’t stopped. It didn’t finish. It didn’t end in the fall where we had hoped it had. And so, what we are seeing now are the supply effects of bird flu happening, you know, really predominantly last year and still going on and ongoing.

[03:48] John Anderson
So let’s talk a little bit about those supply effects, because I think, you know, there are some immediate effects, right? You’ve got birds in production that are affected by it, but then you’ve also got breeder flocks that are affected by this. So, what’s the, do we know kind of what the dominant effect is? Is it just kind of a combination of all these things?  Where’s the impact really hitting that industry?

[04:06] Jada Thompson
Yes, So that’s a great question because it’s a supply chain of layer birds. And so just for the audience who might not know anything, you know, about the egg supply is we have breeder flocks who make eggs to hatch into layer birds. And those layer birds are raised in pullet houses before they get turned into sexually mature, and then they go to a house to lay eggs.

[04:26] John Anderson
And about how long does that take?

[04:27] Jada Thompson
So that whole process is about six months. From the time you’re like, I need a new bird until the time that bird is in the house laying an egg is about six months. And so, what we have is this biological lag. So, during HPI, you know, there were some short-term fixes. It was on a normal replenishment cycle. What we might have done was we have pullets ready to, you know, repopulate a house. It’s going to come out of production because it’s getting too old. And so, during HPI, we were able to move those around. Well, it will rob Peter to pay Paul a little bit, to keep to keep everything online as much as we can. But at some point, you know, you got to pay the Pied Piper and that’s what’s coming up, is that those birds were out of stock. You can’t have 50 million birds just waiting in the wings, no pun intended. And so, then what you have is, is biological lag of six months. So, we had, you know, layers going out in June and July. And six months later, we’re just now starting to see the new birds coming online. And so, we’re down about 5.6% of production in terms of layer counts. And so that’s affecting the number of eggs. I will tell you that that the pullet counts are up. So, we know that the supply chain is trying to refill.

[05:37] John Anderson
So they’re putting more birds in the pipeline. Those pullets, so birds in the pipeline.

[05:42] Jada Thompson
Yeah, that pipeline, you have more layers, you have more pullets in that pipeline, you have more hatching eggs coming out. And then we’re setting more hatching. And I think that it seems to me like, all these numbers we are coming up with, is that we’re doing everything we can within the egg industry to try to replenish as fast as we can. You just can’t fight biology, you know, time has to pass. And so, we’re down all these birds and then you come up to the biggest time of the year, right? Well maybe not. Easter’s probably pretty big egg time too, but you got two major holidays, you have Thanksgiving and Christmas where everybody’s baking pies and making cakes. Everybody’s making extra breakfasts because families in town, you want deviled eggs on the table, you have all of these high demand needs for eggs when we have fewer eggs in the marketplace.

[06:26] John Anderson
So this disruption in the supply chain due to AI, and I’m trying to summarize what you were saying here Jada . So, we’ve had this disruption in the supply chain due to AI, and it started back months ago, but the industry was able to move some pieces around and manage the disruption for a time and so, for example, producers could keep birds in lay longer than they ordinarily would and keep production out of them. And so, we were able to stretch those pullets that normally planned turnover. We could manipulate that a little bit and deal with the disruption, but we sort of ran out of opportunities to do that. And now we’re just we’re to the point where we’ve just got to replace birds. And as this process has been going on, that’s sort of overlaid right on top of the biggest seasonal demand period of the year, which is the Christmas holidays, when everybody bakes.

[07:24] Jada Thompson
You know, you nailed it. You took the words right out of my mouth.

[07:26] John Anderson
So that’s a decent summary of what we’re dealing with here.

[07:28] Jada Thompson
Yeah. So, you have, you know, these AI effects. You have just the biological lags and then you have this high seasonal demand. And so, we have this low supply, high demand. And then you add in all of the other effects on that. And so, adding another spotlight onto eggs is inflation. And we can talk about the cost, but also just as inflation is higher, you know, purchasing parity power goes down and consumers typically switch over to cheaper protein sources. And one of those cheap sources of food is our eggs, right? It’s the most complete source of amino acids you can have. It’s cheap protein, arguably, historically. And so, it’s a big ole spotlight is being put on eggs right now because people are kind of pinching pennies and they’re looking for ways to kind of change their food budget. And then what they’re coming up to is egg prices are higher. So, we’ve added an additional demand component to it as well.

[08:17] John Anderson
So that’s a great point. I mean, we have had this general inflation that’s affected everything we’ve, and we’ve talked about that on this podcast before, things like energy prices and other transportation disruptions affect everything, including eggs. That’s a component of the price of that egg. I want to pick up on something you just talked about, though. If you think about the protein sector generally, we have always talked about eggs being one of the lowest priced proteins. It’s always kind of the low-cost protein. If you think about, okay, we’re in an inflationary period, people are going to trade down to something cheaper. Eggs is what they trade down to. You know, I haven’t looked at this specifically, but are eggs still the lowest priced protein? If you can’t trade down to eggs, what do you trade down to?
Is this shift in demand more toward lower priced poultry cuts, for instance?

[09:08] Jada Thompson
You know, I also haven’t looked at the data and I haven’t looked at the retail where that shift is going. But I think that’s what’s happening. It’s a perception of am I getting as much bang for the buck? You know, the joke is, you’ve seen the memes coming out, you know, about the guy who’s got an egg and it’s a ring, you know, he went to Kay’s. You know, you see these things where it becomes a joke, but also where do I go? Do I go to, you know, leg quarters because I can get, you know, full meals out of those and I don’t have to cook eggs and I don’t to worry about breakages or etc. And so, you know, I think that it does raise a question about what is that protein that people are going to be consuming. And I think with the sticker shock, even though maybe it’s still cheaper, you know, pound for pound, it’s maybe still an affordable source of protein. It’s, I can’t bring myself to pay $6 for that carton of eggs, and so I’m just not going to.

[09:59] John Anderson
And this is not something that I think we’ve done a lot of work on, at least not in a long time, because egg prices have, like I said, they just haven’t been very exciting. I mean, they’ve been very stable. So, we haven’t really worried a lot about, what is the elasticity of demand for eggs. And when I talk about elasticity and what is the price responsiveness of consumer demand, and I’m not sure I have a good sense of that, but a lot of eggs are used in commercial settings as well. It’s not, you know, everybody having two eggs over medium for breakfast with their bacon. It’s a lot of bakery products use eggs and how is that institutional or commercial kind of demand likely to respond? Do you have any sense of that?

[10:37] Jada Thompson
Yeah. So, I think the average American consumers consume 288 eggs per year, and those are not eggs that they’re making at breakfast time. You know, those are the cakes and pies and other things that we’re consuming. And so, yeah, I think that, you know, those bakeries are going to they need to keep pumping out. Little Debbie still needs to, you know, come out with those fudge rounds. And so, what it does is it continues to put pressure onto eggs. So, they’re kind of two different sectors of the egg. So, there’s table eggs, which is what you and I would buy the grocery store. And then there are different processed egg products. And so, a lot of those bakers are buying those process egg products, they’re getting breaker eggs. And so, what happens is when you have a shortage of breaker eggs, it starts putting demand on the table eggs, because they still need to fulfill that. They still need to bake their things.

[11:18] John Anderson
They pull from the table egg sector to meet their breaker egg needs.

[11:21] Jada Thompson
Absolutely right. And so, then you increase the cost of all those. And so, then that’s where, you know, you add to the cost effects on those other those baked products. And then, you know, one of the other things is, you know, the question is always I think the industry gets concerned about is people reformulating, moving away. And the hard part of that is just because eggs are a really great emulsifier. So, what do you do in order to make a cake if you can’t have an egg? And there are some solutions, but are they as available? Are they as tasty? You know, when you start asking those questions and I don’t think you know, in general, I don’t think the egg industry wants to start seeing that. I don’t think you want to see people move away.

[11:56] John Anderson
Well, and that’s you know, there are a lot of good illustration, I think, in this in this situation about people having to make important decisions under risk, I mean, with a lot of uncertainty and those egg users are in that boat. Nobody wants to reformulate, right? I mean, you’ve got a consumer product, you’ve got a system. You’re set up for that formula. Nobody wants to reformulate, but you also don’t want to pay triple your normal price indefinitely. So, at what point do you bite the bullet and try reformulation? Those are the kind of tough decisions people have to make right now.

[12:26] Jada Thompson
Absolutely. And you talked about this, you know, these risk reward tradeoffs. I worked at a private industry, and we made a famous cake there was on the market in the freezer section, and we reformulated at one point, which we thought was going to be great. And, you know, it saved a little bit of cost, and it was supposed to taste the same. And we had consumer flack back so fast that we had to switch back. We will take the price back up. And I think that things like that are, you know, are you trying reformulation and then you lose the quality or the value that you have in your product and how often are consumers going to keep trying your product if they don’t like it? You know, like I come in, I usually like your cakes, but now they’ve just got not good anymore. And I think that this does raise a lot of these risky questions about a tried and true formulation where am I getting my sources from? Is that supply coming online? Everybody wants to know. But, you know, when is supply coming back online? How fast is it going to happen? And that becomes those risky questions. If you know, if I think it’s going to be, this is going to be short term and those supplies are coming back up, maybe I just ride this out. If I think it’s long term, you know, those are the hard questions I’m going to have to start asking myself.

[13:33] John Anderson
So let’s talk about this maybe from that from the egg producer’s perspective, because they’re also making some difficult decisions under risk. Obviously, they’re not thrilled about the situation. Yeah. I mean, you think, well, higher prices are great for them. And there’s been some talk about profits in the egg sector, but this is kind of a dicey situation for them. There’s a potential for a lot of demand destruction from this. If there is money on the table, companies want to be able to take advantage of that. How do you make decisions as an egg producer? What decisions are they trying to make to capitalize on this situation, to bring in more production and to get us through this to a more normal situation? What’s going on right now in the industry around those questions?

[14:15] Jada Thompson
You know, I think that they’re going to be thinking a lot about how do we get enough, how do we get the supply back up? How do we keep that supply of backup with AI still in the marketplace? And is AI going to be a permanent fixture? Is this going to be for the next year? Is this two years? Is this five years? And those all change the risks and decision-making strategies? You know, I was talking to somebody earlier. We did discuss, you know, what is this going to look like, building more capacity to just basically building the capacity to account for these losses from AI. And so if we have this change in capacity, that’s capital intensive.

[14:52] John Anderson
And those are long run investment decisions

[14:54] Jada Thompson
Huge long run investments.

[14:55] John Anderson
This is no longer a short run situation at that point. That’s at least probably a 20-year investment decision, I would guess, for these companies.

[15:02] Jada Thompson
Absolutely. And so, then the question comes is do we make that decision today for this 20-year investment that we might not need come next year? And so, I think that there’s a lot of uncertainties that are coming up. And so, you mentioned profitability, and one of the questions is, are they you know, is some of this money going in to start thinking about how do we address and what investments do we need to make to make this better?
You know, there were a lot of losses earlier in the year. So, prices were low and there were, you know, losses of prices. And then we add in the kind of other factors, you know, which we haven’t touched on, but like feed prices, you know, have really substantially affected, which are going to affect those other those long term, you know, as a processor, how am I going to adjust for these risks and uncertainties on my cost of production and losses of production, which are driving both of, you know, the kind of drivers of the prices that we’re seeing?

[15:52] John Anderson
Yeah. So, I think we’ve got to this is this is a tough kind of situation, I think, for a manager to operate in because if I’m Cal-Maine or Roeske Farms and I decide, okay, you know what we need more capacity. We’ve got to have more breeder capacity so that we can supply more birds and deal with higher mortality from AI. And I make an investment now with 20-year implications. And then two years from now, we haven’t had a case of AI in two years. Then what have I done to my market right now? And probably in an oversupply situation and I’ve cut my own throat?

[16:28] Jada Thompson
Yeah, absolutely. You know, we’re going to see the price tank. You know, one of the things that happened in 2015 was the market was surprised by AI. You know, it was what is this? How long is it going to be? It was a completely unprecedented and so it was a little bit slower to react to the supply chain, to those replenishment efforts. And so, they started. But again, you have a six-month lag. And so, what happened was, is we you know, as the industry tried to adjust, we saw this these higher prices in 2015 and then you saw a really deep decline in prices, and it was related to this oversupply. And so, I think the same thing when you’re talking about your manager, which I don’t envy them right now, having to think through all these decision making is what am I looking at the long run? What am I looking like in the medium run, what am I doing in the short run? And how is that going to impact it? Because if we start putting more breeders in the market, this isn’t going to be the effect of price. It’s not changing prices tomorrow. We’re talking about changing prices eight months from now, you know, nine months from now. And I don’t know what that market’s going to look like. And I don’t know, are we going to be in the same supply shortage or not

[17:30] John Anderson
Real danger of overshooting and being whipsawed by the market then?

[17:33] Jada Thompson
Absolutely. Yeah. Again, I don’t envy them.

[17:36] John Anderson
Yeah, this is a tough situation. Although, you know, if we think of the history of AI, you know, I think until fairly recently and maybe I’m wrong about this, but I think until fairly recently we’d kind of thought of AI as a seasonal thing. And I think, you know, now questioning, I think everybody’s questioning, okay, is this seasonal or is this endemic now? Is this something that’s a permanent and regular feature of our market, or will we get back to a point where this is kind of a seasonal concern and there hasn’t really been much break in this in a while?

[18:08] Jada Thompson
No. And I think that those are questions that are on everybody’s minds. And I think there’s a lot of research being done about that. You know, prior to 2015, you know, the last case of AI in the U.S. was, I think, 2004. And so, you know, there’s a huge, long period without AI we had 2015 and it was, okay, let’s hope this is a ten-year disease where we don’t see it, you know, for a very long time and then it pops up again. And so, the question kind of comes around is this particular strain is host adapted. So, it’s living in wild birds, you know, they’re not dying off. It’s more susceptible for layers and more susceptible for turkeys, for older bird was why the layers are more impacted. And so, you have all of this susceptibility. We have these wild bird migrations, and then it’s not dying off like we hoped it was. And then you also add in the global component to this. This is a global disease. You have outbreaks in almost every continent right now. You have Africa, Asia, Europe, and then, you know, here in the Americas, I think it’s South America as well. You know, so you have this global event, you know, this global issue where even if we got it under control, like, does it stay under control? And I think it’s this particular strain that has got everybody scratching their heads, how do we deal with this? I don’t think everybody’s ready to call it endemic yet.

[19:21] John Anderson
And that that has some serious implications, I think, when you do that right, because then you start thinking about things like vaccination programs and other interventions. And those are kind of difficult to pull off in this kind of industry.

[19:32] Jada Thompson
Yeah, absolutely. You know, I think with vaccinations is another question people have asked about AI. And it’s, well, why aren’t we just vaccinating and moving on you know solve the problem. And part of that is the current vaccination strategies is six months apart, two shot cycle. And so, you know, broilers are out there, they’re too small anyway or too young and then maybe layers or maybe turkeys. But now you get into feasibility of vaccinating all of those birds. And so, the question is, is what kind of technology is there to inoculate that many birds?

[20:01] John Anderson
What kind of delivery mechanism for the vaccine?

[20:04] Jada Thompson
Absolutely. So, like, is it can we put it in the water? Can we put in the feed; can we aerosolize it? Can we do something so that it’s more effective and efficient to disseminate? But I don’t think that technology is there at the moment. I think the other question you have to ask with the vaccination strategy is acceptability of it.

[20:20] John Anderson
In the global market.

[20:22] Jada Thompson
In the global market. So, like, you know, maybe consumers here, you know, we already vaccinate for Newcastle, we vaccinate for Marek’s disease, we have some kind of vaccination. I think most consumers are just unaware and we’re okay with that. But on a global scale, we have to think about how do we export our export markets. And maybe in layers, you know, I think it’s 3% of the market is destined for international markets, which doesn’t seem like a lot. But if you’re that 3%, it feels pretty substantial to you.

[20:48] John Anderson
More like 15 when you talk about broilers or something like that.

[20:51] Jada Thompson
Absolutely. So, like when you have this huge market for broilers and then the question is the overlap between those industries. And so a decision you make in one industry is going to impact another. And I think that’s part of the concern is until we can be assured that we’re not going to lose this 15% to 20% of our actual market in broilers, what does the strategy look like?

[21:11] John Anderson
Yeah, basically this comes up all the time with animal health issues where the international community really has to coordinate on a protocol that everybody can agree to so that product certifications and standards and labeling and all those sorts of things can be aligned. I mean, this reminds me really more of like a foot and mouth type situation where, okay, we could vaccinate for foot and mouth, but that has big trade implications because then it’s really hard to test for whether the disease is present or not. Something similar would be at work here, I think, with AI. Is that right?

[21:42] Jada Thompson
Yeah. I mean, that’s a great example to use is that you need this kind of global coordination. Our broiler industry wouldn’t be able to absorb that extra 20% of our market if we couldn’t sell it.

[21:54] John Anderson
And again, I mean, we bring that up to say this is part of the reason that the response to AI takes time. You can’t just say, great, let’s just start vaccinating chickens. You’ve got the technical barriers to how do you vaccinate literally tens of millions of birds. You’ve got trade related issues about product acceptance and how that affects global supply chains. These are really long-term issues that have to be worked out.

[22:20] Jada Thompson
Absolutely. And I think that everybody’s very cognizant of the decision making you’re making today. We talked about those businesses that are having to think about these long 20-year investments. I think there’s the same type of parameter for risk they are having a weigh out. The decisions, we can’t be rash in making this decision to control it today because it’s going to have long term implications. And I think that everybody is coordinating that. And I think that there are lots of conversations that are happening local, state, federal and international level to think about AI and to think about how we control and mitigate diseases like this.

[22:54] John Anderson
Yeah. So certainly, a big incentive to sort this out in the market right now. You know, we’ve talked about prices, we’ve talked about profitability. There’s a big incentive for everyone in this industry to work on alleviating the supply chain disruption that we’ve had. But there’s a time component here that’s hard to rush.

[23:15] Jada Thompson
Yeah, I think that, you know, wash pots never boil. You know, I think that’s a little bit of where we’re at, is we want a solution. You know, as a consumer, I want my egg prices to come down. I don’t want to pay that much. I don’t want to have to think if I’m a baker, I don’t want to think about reformulating. I just want to be able to have my supply. I think that there are market signals saying that some of that supply shortages is going to come back online. We’re going to see some of that easing. We’ll see a little bit of that pricing. But from this decision making, you’re still facing AI in the market. You know, it exists here. We’re still having to deal with that. You’re still having to worry about the volatility of the market and how do we address all of those issues, short and long term with the technology, with prices, with all of the other factors that are going to contribute to this.

[24:02] John Anderson
Right. I think it’s probably a good place to leave this one. Jada, I think this is a topic we’re probably going to have to come back to in maybe two or three months and see where we are and see if maybe what we said today holds up or not.

[24:15] Jada Thompson
Well, obviously, we’re really great at reading the crystal ball over here. It’s going to be amazing.

[24:19] John Anderson
But that’s right. So, this is an ongoing story and one that we’ll talk about. Again, I think a fascinating example of how market participants really have challenges making decisions under uncertainty. And I think as good of an example of that, as I’ve seen really in the last ten or 15 years, so difficult situation, but one that the market is sorting through and one that we will certainly keep on top of. Jada, thanks for joining me today.

[24:43] Jada Thompson
Yeah, thanks for having me. It was a good talk.

[24:45] John Anderson
All right, this is John Anderson with the Fryar Price Risk Management Center of Excellence at the University of Arkansas. Thank you for joining us for this Relevant Risk podcast.

[24:56] Intro/Outro
Thanks for listening to the Relevant Risk Podcast, a production of the Fryar Price Risk Management Center of Excellence in the Department of Agricultural Economics and Agribusiness within the University of Arkansas System. The Fryar Price Risk Management Center of Excellence carries out teaching activities through the Dale Bumpers College of Agricultural, Food and Life Sciences at the University of Arkansas in Fayetteville and research and extension activities through the University of Arkansas System Division of Agriculture. Visit fryar-risk-center.uada.edu for more information. Thanks for listening.