The consumers’ demand for fresh shell egg has stay constant and strong in the past several years as indicated by companies’ sale volumes. AI’s outbreak increased the volatility in price and supply in this sector since 2015.

Sector’s current, trend, causes behind trend, and future

Current and Trend

• Demand for shell eggs from retail consumers has been strong, which is consistent with growth in population.
• Volatility in price and supply is very common in this sector following a price and supply cycle. However, it seems AI’s outbreak in 2015 has worsened this situation since then.
• The average selling price climbed to the historical peak, fell significantly to some point much lower than the level before rising, and rebounded. The low price, which is close to 10 years low, caused companies to fall into big profit issues while offset by the decreasing feed costs.
• It seems the egg’s oversupply has had an end in 2017/18 and when the selling price got out of historical low level we have seen significant increase in profit of shell eggs companies.

 

Causes behind the trend

• The factors that influence demand for eggs seem to be the same ones as we see in some of other food sector including demographic change and short-term’s economy situation. Relative shorter production cycles and producers’ ability to adjust their production also contribute to fluctuation in sales and profits, while the price for the major feed costs has been declining.

 

Industry Future

Generally, the demands for shell egg will be still staying strong.  However, the volatility in price and supply will also continue but in a smaller range.

General Financial Performance of Companies In the Sector

While exports and industry’s demand for egg products vary, the demand for fresh shell egg has been staying strong and consistent with the growth in many other food sectors, which are influenced by population factor. It seems that eggs producers have no control on the feed costs of hens. Therefore, in this sector it is basically the selling price determines everything and because duration of supply and demand cycle is relatively short and the adjustment of production is relatively easy the prices of egg are usually widely fluctuate, resulting in the large volatility of companies’ margins and profits.

The recent avian influenza outbreak in 2015 significantly influenced the shell eggs industry, mainly for its prices (according to Nielsen data, retail customer demand for shell eggs has remained strong). Egg prices per dozen increased significantly during the summer and fall of 2015, and reached peak in August of 2015 at $2.97.  After that, the prices started to decline until the low level in summer of 2016. And then the prices went up and down again to the record low level in spring and summer of 2017. In 2018, price rebounded back to about $1.3 or $1.4.

Correspondingly, the companies’ sale, margins, and profits changed as prices did. Because feed costs have been decreasing in the past four years, as selling prices fluctuate the typical company’s gross margin and operating margin reached to the highest in 2016 at 34% and 25% respectively and then went down in 2017 to 4% and -12% due to the plunging of the selling price of egg. In 2018, the gross margin went up to about 25% and 14% respectively.

While it is common in this sector that price and supply are largely volatile, we think if there was no AI outbreak the price should not have fluctuated in such a large range from historical peak to almost historical low in two years. While uncertainties we think the price is on the way to go back up and volatility is getting narrow.

According our analysis, a typical ratio of enterprise price/adjusted EBI should be 25 with less 1% interest/EBI ratio.  The ratio of enterprise price/ sales should be 1.5.

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