The U.S. outbreak of highly pathogenic avian influenza (HPAI) in spring 2015 has predominantly affected turkey and egg producers; broiler producers have felt minimal effects. Prior to the outbreak, analysts estimated the U.S. egg laying flock at roughly 303 million birds. In the past several months, HPAI has decimated the hen population, causing the industry to lose approximately 40 million layers and shrinking the consumable egg supply. Not surprisingly, this has resulted in a sharp increase in wholesale egg prices, particularly for those within the industry who supply eggs in liquid and dried forms.
It is important to understand the differing effects that HPAI has had on two distinct sectors of the egg industry. The U.S. egg laying flock consists of hens that supply both the table egg industry and the egg products industry. Approximately two-thirds of the layers in the U.S. are table egg producers that supply case-ready eggs predominantly to retail grocers. The remaining layers supply eggs to breaking plants that process shelled eggs into liquid and dried forms.
Of the hens that have been lost to HPAI, more than 30 million were within the segment that supplied liquid and dried forms of eggs. This reduced egg product supplies by nearly 35%. This in no way minimizes the approximate 5% loss of table egg supplies due to HPAI, because the rally in wholesale egg prices reflects a very tight supply environment. However, the loss of one-third of the supply of egg products has caused complete chaos within this sector.
Source: Wells Fargo Food and Agribusiness, USDA
It is nearly impossible to predict what will happen throughout the fall season as the southern migration of wild birds takes place. Nevertheless, it is virtually certain that HPAI will reintroduce itself into commercial flocks. Infected wild birds will soon populate all four U.S. flyways, so potential impacts will not necessarily be confined to the epicenter that was in the Mississippi flyway earlier this year. There is also a good possibility that the virus strain mutated over the summer months, which could cause an outbreak that could be more or less impactful than that already seen. More concerning is that the virus likely spread horizontally on breeding grounds during the summer months as infected birds commingled with uninfected populations. This will yield higher infection rates among wild bird populations as fall migration occurs.
Cyclicality in wholesale egg prices has long been a constant within the market, but a constant of which the common consumer is unaware. Restaurants have typically been reluctant to change menu prices, and retailers have commonly treated table eggs as a loss leader in order to drive store traffic. However, this dynamic is changing because of the known and unknown potential effects of HPAI on egg availability. Retail grocers absorbed the increased wholesale cost of table eggs for several months, but shelf prices have nearly doubled in the past few months, an action that projects that the supply shortage will persist. Similarly, restaurants are rethinking pricing strategies for breakfast items, or are removing eggs from certain menu offerings, such as salads.
The supply challenges within the egg market will not subside anytime soon because repopulation is going to take longer than would normally be expected. This is due, in part, to the high number of infected birds. The concentration of infected birds has increased the time required to eradicate the virus, and likely contributed to the continued spread of the virus, particularly in northwest Iowa. As mass repopulation occurs, pullet supply could be challenging, and there may not be adequate breeders to meet demand.
A critical factor that will affect repopulation is the uncertainty related to the reintroduction of the virus during the fall. Producers should not be quick to repopulate houses knowing that hens could be at risk, and government agencies will be slow to approve repopulation for similar reasons. Thus, rebuilding of the commercial laying flock will be a long process that will last well into 2016. This means that heightened egg prices are here to stay.
Poultry and egg companies have braced for a worst-case scenario for the fall season. Most have implemented heightened farm biosecurity measures to protect against infection — although several companies that were affected by the virus were practicing sound farm management practices at the time. It appears that the spread of this strain of HPAI occurs rather easily. In all likelihood, the vectors for the spread are farm equipment and labor, so cross-contamination is a critical concern at the farm level. When the virus reintroduces itself during the fall, limiting the spread to neighboring farms will be the critical determinant in how extensive the losses become. The slightest failure in any line of defense can have catastrophic consequences.