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Blog: Cage Free Eggs - A Real Threat to the Market Structure?
13 February 2020
On November 6, 2018, California voters approved a ballot
proposition requiring all eggs sold in the state originate from
cage-free layers by January 1, 2022. Reactions, expectedly, were
mixed, with animal rights groups lauding the decision and
agricultural associations, producers, and even attorney generals
from egg-producing states voicing vehement opposition.
So what did California's Proposition 12 actually
mandate?
The simple phrasing of the ballot measure, to some voters, might
have insinuated that all hens would now roam spacious pastureland
reminiscent of scenes from Charlotte's Web or Little
House on the Prairie. However, that is not the case.
What California's cage-free law states is that egg-laying hens
may no longer be confined in space less than required by the United
Egg Producers' (UEP) Animal Husbandry Guidelines for US Egg-Laying
Flocks. First, to clarify for consumers, the law did not specify
"free-range," which would be illustrated as hens squawking around
grassy lawns.
The birds still are raised in generally large houses. In its
guidelines, UEP describes three general forms of cage-free, indoor
housing systems that comprise the majority of the industry:
multi-tiered aviaries with a litter floor and slatted-floor
platforms over manure-removal belts,
partially slatted systems with a litter area and a raised
slatted-floor area through which manure drops into a storage pit
below, and 3) single-level, all-litter floor systems.
Without spewing out the entire handbook, the gist is that one
square foot of floor space is required per chicken for houses that
provide multiple levels of vertical space (similar to shelves or
roosts with opportunities for hens to sit above ground). For houses
that only provide a single floor (hens only have access to one
level), 1.5 square feet of floor space is required per chicken.
Further guidelines regarding nest space, perches, and litter can be
found here.
While one might wonder what all the fuss over the new
requirements is about, the fact of the matter is that it requires
producers to change how eggs are generated.
How will this impact producers?
California's population is around 40 million people, making it
larger than two-thirds of the countries on the planet. Further,
around two-thirds of its eggs originate outside of the state. This
means that farmers in Iowa, Ohio and Indiana, for example, are
being forced to transition their facilities to the California
legislative guidelines or be shut out of the California market.
Only about 20 percent of the US layer population is cage-free.
This means that, while California's needs could be met, there would
be little cage-free stock for the rest of the country. In theory,
this might be permissible but, across the nation, the topic of
cage-free is somewhat en vogue. Michigan, Oregon and
Washington all have passed cage-free laws, with other states
considering or having passed similar (but perhaps more vague)
legislation.
To further complicate matters, hundreds of private companies
have pledged to use and sell only eggs certified as cage-free, with
varying deadlines. Some include McDonalds, Dunkin, Subway, Hilton,
IKEA, Hormel, Unilever, and Whole Foods. Needless to say, the
current capacity to produce cage-free eggs is nowhere near what is
needed to meet that amount of demand.
UEP has forecast that, to meet these cage-free pledges, the US
will need at least 225 million cage-free layers in production by
January 2026, which would equate to an average of two million hens
transitioned to new housing per month until that time. While not
impossible, this is no easy task for producers or supply chains.
Clear economic incentives, governmental penalties for failure to
transition, or other catalysts may be necessary at this juncture to
induce producers to convert to cage-free.
What could this transition mean for the market
structure, operations or prices?
It is unlikely the overarching structure of the egg market will
change significantly, as eggs are sold on either a contract or on
the spot market. The expected change is in the product composition
of the market, with increases in cage-free eggs and the inverse in
traditional cage-raised eggs. Operations should remain
overwhelmingly the same, as all that is changed is the internal
machinery/infrastructure in houses. Some cage-free operations will
require manual egg harvest, increasing labor costs.
Is there potential that retailers might have to look
outside the US for volume to meet the legislative and commercial
commitments being made?
Our expectations would be in line with the US farming
organization United Egg Producers' predictions, that for nearly 2/3
of the market to transition an average increase in cage-free layer
flock of around 2 million hens per month is required. How smoothly
or consistently producers transition (totals per month) is up for
debate. The already in-place two-tier pricing system, which puts
cage-free eggs at a premium, should remain. We would expect prices
for caged eggs to remain volatile, with it being unlikely they drop
much lower than prices experienced in fall of 2019. As long as
cage-free eggs maintain a premium there will likely be a
significant consumer base preferring the lower-priced item. If
cage-free egg production stays ahead of demand, however, we would
expect those prices to decline. The chance American retailers need
to import cage-free eggs is miniscule, as in the US huge quantities
of eggs are sent into processing and storage as excess
inventory.
Legal battles are ongoing, with associations and states suing in
hope that the laws will be overturned. The bottom line is that the
cage-free battle is nowhere near decided. One might even say it is
ramping-up.