Avian Flu ― Higher Grocery Bills for Consumers and Higher Input Costs for Producers

Takeaway: Currently estimated that more than 30 million birds have been euthanized because of AI.

This is an unprecedented outbreak that U.S. farmers have never had to deal with, it is currently estimated that more than 30 million birds have been euthanized because of AI.

 

Recent Events:

Thursday, May 14th, Post Holdings announced that roughly 25% of the company’s egg supply has been affected after the most recent AI outbreak in company owned chickens in Nebraska. Just three days ago on Tuesday they announced the flu had affected 20% of their supply. When they announced the 20% it was estimated it would be a $20 million hit, they are working on updating this estimate now.

 

Tuesday, May 12th, agriculture officials confirmed that the outbreak has been spread to Nebraska, making it the 16th state with confirmed cases of the virus.

 

May 1st, Iowa Governor Terry Branstad declared a state of emergency due to the outbreak in his state.

 

Into the Note:

It is widely accepted that the Avian Flu virus poses no threat to humans, but every chicken or turkey that is infected must be destroyed in order to preserve the health of the poultry population. We are beginning to see an impact on prices and availability at the grocery store. Dr. Dermot Hayes, an agricultural economist at Iowa state explained that, “…for every million birds we lose, we’ll see about a 1.6% price increase…We’re looking at between a 20-30% increase in retail prices.” With these rise in prices it’s not just the cartons of eggs that will be affected, there are many products like mayonnaise and ice cream that use eggs as an ingredient.

 

What does this mean for the rest of the breakfast category?

Per our recent discussion with David Sprinkle at Packaged Facts, eggs hold the number 1 household usage rates for breakfast in the United States, as seen in the chart below.

 

Avian Flu ― Higher Grocery Bills for Consumers and Higher Input Costs for Producers - Avian Flu Chart 1

 

With these rising prices soon to be seen across the country, we do not believe usage will stay this high.  Average price for a dozen eggs in March 2015 was $2.13 per dozen (BLS), while a box of Cheerios on Amazon Fresh are $2.99 and Milk is $3.46/gl (BLS).  As the price of eggs begins to creep up, we believe that it won’t be a default choice for consumers to pick up a dozen eggs as their go to choice for breakfast.

 

GIS, K, POST

We expect to see slight benefit going forward in the cereal category as consumers rethink their breakfast choice and go back to the classic bowl of cereal. But the bigger problem we see is the hit this will be to POST’s earnings. POST’s Michael Foods division a processor and distributor of mainly egg products representing ~28% of POST net sales, will undoubtedly be an area of concern for management. POST management recently stated, “Michael Foods is taking various measures including discontinuation of certain product lines and appropriate pricing actions to offset reduced egg supply and increased operating costs.” This spells trouble for earnings going forward and there is no telling yet just how deep the impact will be.

 


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