The Avian Flu (AI) has been wreaking havoc on the egg and poultry industry this year. As I was researching our previous note on AI on Tuesday (printed on 5/27/15) it was looking that poultry farmers were getting a break with no reported infections for five days. But that optimism was short lived as another outbreak was detected in Nebraska and Iowa, affecting 293,200 chickens and 20,700 turkeys respectively in each state.
Wholesale egg prices continue to rise, nearly doubling versus pre-AI prices. As we previously reported companies are looking elsewhere for eggs, mainly international and alternative egg-substitutes.
Importing eggs is more complicated than it seems, and given the U.S. has always been an efficient producer, few countries are pre-approved for egg importing. French and Dutch farmers are acting fast to try to take advantage of the U.S. AI outbreak, working with their embassy’s in the U.S. to expedite the approval process.
You may be thinking, what is the difference between a U.S. and a European egg? When you travel to Europe you will notice in a majority of supermarkets that the eggs are not refrigerated, while in the U.S. they are always refrigerated. This is because eggs have a natural protectant on them called a cuticle, which acts as a shield to keep bacteria out. In Europe they are required to not clean the eggs and leave the cuticle intact, while in the U.S. all eggs must be washed in 90⁰F water and sprayed with sanitizer. Given this difference there will have to be a change in process to export the eggs to the U.S. but European companies want to take advantage of this opportunity.
After speaking with industry professionals we have determined that the egg prices in Europe are usually priced at about a 20% premium in a non-AI environment, and that to do all the additional cleaning and ship the fresh eggs across the pond would cost an additional 20% on top of that. We have provided our math in the below chart for a visual:
POST provided an update on the recent AI outbreak that is affecting their business. They are now stating that a third of company owned chickens in Nebraska has tested positive for AI. Bringing the total affected supply to ~35% of the company’s volume commitments. Post management has determined that this amount of loss constitutes a force majeure event for the Michael Foods egg business. They have started to take drastic measures to minimize the financial impact such as, discontinuation of certain products and price increases.
HRL has stated that their Jennie-O turkey supply has been greatly impacted by the AI outbreak in Minnesota and Wisconsin and could inhibit their ability to fully meet orders, and will assuredly raise prices. Thanksgiving feels far away but when you calculate the time to clean facilities and get birds to a mature size, it doesn’t seem possible that they will be able to fully rebuild their supply.
As the summer approaches we will begin to see a slow down as the AI and all flu’s for that matter don’t survive well in high temperatures. One concern is when migrating birds from northern states start to fly back south in the fall we may have a relapse of AI, but not to the same extent we are seeing now.