Cage-free eggs: The latest trend or a new commodity?

Matt StommesMatt Stommes, Wells Fargo Sector Manager, Poultry, Beef, and Pork Protein Sectors

Growing up on a farm, I continually observed the passion and hard work that my dad put forth to care for our Holstein cows and calves, serving as their nutritionist, doctor, physical therapist, and general laborer. He provided them maximum comfort, cleanliness, and timely feeding and milking, recognizing that giving the cows a better life typically meant better returns and maximized efficiency.

While traveling the U.S. and having conversations with egg producers, the cage-free conversion trend has caught my attention. I’m convinced that egg producers care for their layers with the same passion that my dad cares for his cows, so this raises some legitimate questions. After centuries of improvements in the table-egg industry, why the change in course amidst increasing concerns about feeding the world’s expanding population? Will this housing change make laying hens happier and healthier? Will added costs in some areas of the farm lead to cut-backs in other areas? Is increasing cage-free egg production just the latest fad, or is it going to lead to a new commodity egg?

Over time, the U.S. egg industry has worked diligently to become more efficient at producing eggs, at the same time, controlling costs so that consumer eggs could remain highly affordable. In order to increase production efficiencies, egg-laying chickens have been genetically modified to produce a larger number of eggs that are consistent in size and quality. And, chickens are fed an amount that provides the most efficient production. In most egg production operations, chickens have their own individual cage to limit things like pecking-order stress and also to limit motion so energy is redirected to egg production. With this cage configuration, few eggs are stepped on, cages stay clean, and chicken barns remain sanitary because feed stays separate from bird droppings, and birds can be taken from their cages one-by-one at the end of their life cycle.

This conventional egg producing methodology seems to cater to the consumer, doesn’t it? Well, not all consumers. While affordable pricing has earned eggs the nickname of the “low-cost protein”, some consumers are suggesting that humane treatment of chickens should take priority over egg production costs. So, chicken freedom has brought about the incredible, edible, cage-free egg.

Egg-laying chicken farms across the country are currently tearing out cages and replacing them with more expensive, motion-limitless, egg-laying platforms. While adding costs to egg production may feel like we are taking a few steps backwards, consumer demand has typically guided retail evolution, and again is shaping the next decade of egg production. The big unknown is predicting cage-free egg demand come 2025. Will all consumers demand eggs produced in a cage-free environment instead of conventionally produced eggs, or will some consumers still prefer a lower-cost alternative? Judging by the number of cage-free pledges, some would say that cage-free eggs will be the new “commodity” egg by 2025. Arguably, if at that time, cage-free eggs make up more of the market than conventional eggs, they will be the new standard for egg pricing.

Production vs. demand

Though producers have begun converting to cage-free egg production, most are being careful not to get ahead of the demand, producing more higher-cost, cage-free eggs than they can sell, for fear of having to sell some on the open commodity market.

However, an interesting twist has occurred that will spur conversion. Spurring on this activity, an overwhelmingly large number of egg distributors, egg retailers, and restaurants have jumped on the public relations bandwagon, and are spurring on this action with most having declared a goal of delivering 100% cage-free eggs by the year 2025. McDonald’s, for example, announced in September 2015 that they would switch to 100% cage-free eggs in the U.S. and Canada by 2025. Cargill, McDonald’s egg supplier, is taking rapid action and has declared financial support of their entire supply chain to meet McDonald’s needs. Bottom line, McDonald’s believes their brand perception will be enhanced by converting to cage-free eggs, and is banking on the fact that positive perception outweighs the increased production costs.

At present, all companies that have made public, cage-free pledges seem to be making their decisions based on brand perception, rather than current demand or scientific findings. Cage-free eggs have the same chemical make-up as conventional eggs, and the USDA states that there is no definitive scientific data identifying a nutritional difference in egg nutrition based on the housing of chickens.

Company Making Cage-Free Pledge

California’s lead

Similar to clothing fashion and tax trends, cage-free eggs originated in Europe and are moving into the U.S. through California. Europe’s flock was converted over to colony-raised eggs a decade ago, but took time to convert, just as in the U.S. The European Union conversion took around 15 years to complete, and they moved from battery cages to “enriched” or “colony” cages that hold up to 90 birds and allow hens to spread their wings and move around more freely. However, these cages are more restricting than the cage-free barns being installed in the U.S.

California’s colony/cage-free mandate passed in 2008, and even with a state mandate, California farms didn’t meet the legal expectations by the 2015 deadline. I believe that the entire U. S. egg industry will not fully convert to cage-free eggs by the implied deadline since the remainder of the U.S. egg industry isn’t being forced to covert by virtue of a government mandate. Barring such government mandate, I predict that there will still be significant demand for non-cage-free eggs after the year 2025. Consumer demand has always guided retail offerings, and if consumers still demand conventional eggs after 2025, retailers will sell them since retailers recognize that offering consumers choices, not limiting them, equates to success.

Bottom line, it’s not a small price difference when comparing conventional eggs to cage-free eggs. Recently, Walmart’s online grocery shopping for Minneapolis, San Francisco, and Miami listed a dozen large eggs at 89 cents. A dozen cage-free eggs for the same cities were listed at $2.98 − over three times the price.

Large Egg Prices September 2016

Source: USDA Agricultural Marketing Service, USDA National Agricultural Statistics Service

Large Egg Prices

Source: USDA Agricultural Marketing Service, USDA National Agricultural Statistics Service

Cage-free vs. free range

The USDA states that cage-free eggs are produced by hens housed in a building, room, or other enclosed area that allows unlimited access to food and water, and provides the freedom to roam within the area during the laying cycle.

In addition to many of the cage-free layer requirements, free-range egg layers, also have continuous access to the outdoors during their laying cycle.

The numbers and the dollars

There are nearly 305 million egg-laying chickens in the U.S. today, and approximately 38 million are cage-free egg-laying chickens, with some being free-range. To meet the pledge target of most companies by 2025, close to 200 million of the chickens will need to be converted to cage-free.

At an industry conference in September 2016, Agri Stats showed an increase in cage-free layers from 17 million in 2014 to 24 million in 2015. At this pace, around 95-115 million U.S. layers will be cage-free by 2025. This pace will likely increase as current capital projects throughout the country get under way, and more cage-free equipment from Europe makes its way to the U.S. So, while we’ll likely not reach the 200 million cage-free layers that correlate to current pledges by 2025, 150 million seems like an attainable number. This would equate to conversion of about 50% of the total U.S. market by 2025, if the total number of layers remains at 305 million.

US Table Egg Layers

Source: Agri Stats, USDA

According to the USDA, cage-free conversion in the U.S. is expected to cost around $40 per bird, or over $7 billion of total industry capital to reach 200 million cage-free layers by 2025. But, in addition to the capital costs, there are additional operational costs, and cage-free layers experience a higher level of mortality. While cage-free layers exhibit better overall health from more exercise, they also incur more broken wings and bones with the increased freedom. As an additional downside, feed and droppings mix frequently, leading to a much less sanitary environment ripe for the spread of disease.

In summary, cage-free conversion comes with a high price-tag, and farmers will spend their money wisely. Since food and agriculture production is a low-margin business, until cage-free demand proves itself, it’s going to be tough to cost justify expensive changes to egg-laying chicken barns.

Leanne PearceMatt Stommes, is a sector manager in Wells Fargo’s Food and Agribusiness Industry Advisors Group and focuses on the poultry, beef and pork protein sectors.

Matt joined Wells Fargo in his current role in 2016. Immediately prior, he worked as a production supervisor for Cargill, leading a team of 10, and maintaining responsibility for the management of an eight million bushel capacity grain terminal. Previous, he held the role of business analyst for Cargill’s grain business.
He received a bachelor of science in business from the University of Minnesota’s Carlson School of Management in Minneapolis with majors in finance, risk management and insurance, and supply chain management. Additionally he completed a minor in construction management.
Matt grew up on a dairy farm in Eden Valley, MN as the oldest of 11 children. His parents still milk about 60 cows on a 350 acre farm. Matt is married with one young daughter and lives in southwest Minneapolis.