Focus: UK food industry faces egg-streme prices
By Katy Askew | 16 March 2012
EU states that have failed to meet new rules on animal welfare cannot export eggs - pushing up prices in UK
UK egg prices have seen a dramatic increase in the wake of the introduction of an EU ruling on animal welfare, with obvious implications for the margins of food manufacturers. However, there are those in the egg industry that insist prices are still not at a level to make egg production sustainable. Katy Askew tries to crack the story.
At the beginning of January, a new EU ruling came into effect that banned the use of conventional barren battery cages. Instead, eggs produced in the EU must come from chickens that live in "enriched" colony cages, which allow the birds some room to flap their wings or scratch.
Good news for chickens. Perhaps - in the short term - not such great news for the food industry.
UK egg producers have phased out the use of conventional battery cages, investing in excess of GBP400m (US$632.5m) to introduce the new enriched cages. However, producers in 13 other EU countries have not fully complied with the ban.
According to the British Egg Products Association, around one-quarter of EU cage egg production currently fails to meet these new legal requirements, with approximately 50m hens still being kept in barren battery cages, producing more than 40m eggs each day.
Eggs and egg products that are produced in conditions that fail to meet the minimum EU requirements cannot be marketed outside their country of origin, meaning that the supply of imported eggs has dropped off significantly in the UK.
Exacerbating this situation is the fact that legally-produced eggs are being diverted to meet domestic demand in national markets throughout the EU, so even those eggs that could be exported are failing to reach the UK wholesale market.
"Retailers, caterers and food manufacturers buying cage eggs on the wholesale market, a significant proportion of which is traditionally supplied by imported eggs, may have difficulty in securing a supply of legal eggs," the BEPA reveals.
As demand tightens, the price of eggs has been forced up and manufacturers that failed to lock-in supply before the EU animal welfare regulations came into effect may even be facing supply shortages, BEPA chief executive Mark Williams warns.
"British Lion egg producers have invested heavily in the past few years, not only in complying with the new legislation, but in making it clear to their trade customers that they should plan ahead to ensure they had a supply of legal eggs in 2012," he says. "Unfortunately some of those companies that ignored our publicity last year that the clock is ticking have ended up with egg on their faces."
The Food and Drink Federation, the UK industry body representing food manufacturers, says the shortage of eggs is having a varying impact on food companies.
"Different manufacturers will be affected by the current shortage of eggs in different ways depending on the amount and type of products they use, the availability of alternative supplies and their contractual arrangements with suppliers," a spokesperson for the FDF says.
According to the FDF, food manufacturers are concerned about the current shortage on two levels. Firstly, they must look to offset increased input costs as the price of eggs rises and, secondly, they must be wary of concerns over availability.
"Manufacturers will continue to do all they can to mitigate the increased costs of compliant eggs to avoid passing them on to consumers, however there will come a time when it will be unsustainable for businesses to absorb all of these costs and prices may rise," the FDF says. "For other manufacturers availability of these important raw materials will be the greater worry although it is simply too early to know how long this tight supply situation might last and whether it could cause manufacturers to produce smaller quantities of product."
Spiking egg prices will have less of an impact on the UK's largest retailers, the BEPA predicts. The UK retail market for shell eggs is dominated by eggs produced in the UK that carry the British Lion mark, while more than half of retail egg sales are from free range hens, the industry body observes.
Nevertheless, the shortage of supply and inflated wholesale price is beginning to divert eggs away from the retail sector, again causing potential supply issues.
As a consequence, the price that egg packers that supply the country's retailers are paying for egg products is also rising.
Fridays is one of the country's largest egg companies supplying the retail sector and packs around 7m eggs a week. In a bid to ensure the stability of its egg supply, the company recently announced a major increase in the price paid for free-range eggs.
In a letter to producers, Fridays operations manager Martin Flegg said the company had increased the price it pays free-range chicken farmers by GBP0.07 for very large, large, medium and small eggs and by GBP0.10 for seconds and farm seconds.
Flegg said the market is being driven by a lack of availability for colony eggs.
"The free range egg market is less oversupplied than previously due to other packers cascading free-range eggs into colony along with supermarket promotions and some producers delaying restocking their pullets," he wrote.
"To date we have only had success in raising colony eggs prices to supermarkets. Therefore our producer price increase is temporarily supported almost entirely by this. We hope free-range selling price will rise soon."
According to National Farmers' Union poultry board chairman Charles Bourns, despite the recent increases, free-range egg prices must rise still further - and remain higher - in order for the sector to operate on a sustainable basis.
"Egg producers have responded to both legal requirements and market demand over the years by converting to new enriched cages and free-range production, making significant investments in the process," he says.
"Many have borrowed serious amounts of money to invest in new buildings in the run up to the conventional cage ban. Producers have been struggling to meet capital repayments and run profitable businesses. We know the market has been affected by oversupply until recently, but there are very clear signs it is now on the turn. Free range producers need to see a significant increase in the price they receive that reflects the cost of production and allows future investment and innovation in businesses in the future. As it stands, the majority are making a loss and this is now unsustainable.
"Retailers in particular need to think about the long-term security and future supply of British free-range eggs and avoid the risk of irreparable damage being done to the free-range egg supply base by not getting the market signals right now."
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Focus: UK food industry faces egg-streme prices