Egg Prices Jump as Bird Flu Spreads

May 22nd, 2015

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Category: Miscellaneous

Monthly.Market.Overview450x299(Wall Street Journal) –  The financial toll of the worst U.S. bird-flu outbreak in history is soaring, forcing some poultry companies to suspend operations and boosting prices for eggs and turkeys as supplies tighten.

Egg companies—the sector hit hardest by the virus—and turkey producers are spending millions of dollars to try to contain the disease. With eggs in particular, the problem is greatly complicated by the way the American industry is concentrated in the hands of relatively few producers.

The U.S. government has earmarked nearly $400 million to help compensate poultry farmers for culled birds, cleanup and disease testing.

Avian influenza has resulted in the deaths or extermination of at least 38.9 million birds, more than double the previous major U.S. outbreak in the 1980s. Of that total, more than 32 million are egg-laying hens, accounting for about 10% of the U.S. egg-laying flock.

The wholesale price of “breaker” eggs—the kind sold in liquid form to restaurants like McDonald’s Corp., food-service supplier Sysco Corp. and packaged-food producers—nearly tripled in the past month to a record $2.03 a dozen on Thursday, according to market-research firm Urner Barry. Meanwhile, U.S. prices for wholesale large shell eggs, those sold at the grocery store, have jumped about 85% to $2.20 a dozen in the Midwest. Wholesale turkeys cost $1.14 a pound for a frozen 16-pound bird, 4.5% higher than the price a year ago, according to Urner Barry.

Prices at grocery stores are expected to rise as retailers pass along the higher costs.

“This is completely unprecedented,” said Brian Moscogiuri, who tracks the egg market for Urner Barry, which has quoted industry prices for 150 years.

The egg-supply squeeze is pinching profits for some food makers. Post Holdings Inc. warned last week that avian flu has affected about 25% of its egg supplies, forcing it to discontinue some product lines under its Michael Foods business, which makes liquid egg whites and egg product ingredients. Earlier this month, it estimated that fiscal 2015 operating earnings would be reduced by $20 million due to the bird-flu outbreak. A Post spokesman didn’t respond to requests for comment.

The highly infectious H5N2 strain of avian influenza is a mix of a deadly virus that originated in Asia that later combined with North American versions, according to scientists. Researchers think it is spreading through the droppings of wild ducks and geese as they migrate to the upper Midwest. The human-health risk of the virus is considered low, and no human infections have been identified so far, according to federal agencies.

The outbreak has wiped out about one-third of the egg-laying flock in Iowa, the biggest U.S. egg producer. Some egg companies are unlikely to survive because of the costs of culling animals and having to go months without revenue while facilities are cleaned and repopulated with hens, according to Chad Gregory, president of the United Egg Producers, a trade group.

 

“Virtually every egg layer in [Iowa’s] Sioux County is either dead or dying,” said Jim Dean, chief executive of Centrum Valley Farms and Center Fresh Group, a collection of four egg-producing companies in Iowa. He said three of the four Center Fresh companies, which together rank among the biggest U.S. egg producers, have been “completely shut down,” but he hopes they can resume production.

The outbreak has had an especially pronounced impact because the industry is highly concentrated, with farms on average containing around 1.5 million birds, according to the trade group’s Mr. Gregory. When the virus is confirmed in one hen house, birds in all of the other nearby houses typically have to be killed to prevent further spread.

The U.S. has fewer than 200 commercial-egg companies, down from about 10,000 in the 1970s, Mr. Gregory said.

“One of the problems we’ve had through this outbreak stems from the massive population of chickens on these farms today,” said Marcus Rust, chief executive of Indiana-based Rose Acre Farms, one of the largest U.S. egg producers. “Our customer base is demanding the lowest cost possible and that causes us to put six million chickens on one farm. When something like this happens, just that one farm going out [of production] can cause the entire market for eggs to go up five cents a dozen.”

Mr. Rust said 8% of Rose Acres’ hens have been wiped out because the virus has hit one of its Iowa facilities, leading the company to clear nearby houses too.

Egg producers not touched by the virus stand to benefit. The stock price of Cal-Maine Foods Inc., the biggest U.S. egg producer, has surged 30% in the past two weeks and hit record highs amid expectations the Jackson, Miss., company will get a boost from rising prices. Cal-Maine’s operations mainly are in the South, which has had fewer cases of avian influenza so far than the Midwest. The majority of broiler farms—where chickens raised for meat are grown—are also concentrated in states like Georgia, Alabama, and Arkansas.

Producers will be reeling for years, egg-industry officials said. One of the major challenges will be the cost to repopulate egg-laying facilities that together house millions of birds on some farms.

The U.S. Department of Agriculture, meanwhile, has allocated just under $400 million to cover claims from poultry farmers that have culled flocks to stem the spread of the disease.

“We understand this is a painful event for [producers] and want to support them to the greatest extent that we can,” said T.J. Myers, USDA’s associate deputy administrator for veterinary services.

As of Wednesday, the agency said it has committed $149 million to be paid to producers that have indemnity claims on their flocks.

Turkey production, meanwhile, is also expected to take a hit, with about 2.5% of the nation’s flock affected, according to calculations based on federal data.

Hormel Foods Corp. one of the largest turkey producers in the U.S., said earlier this month that the company was temporarily moving to one shift from two at a Jennie-O Turkey Store plant in Minnesota, resulting in about 230 job furloughs. Jeffrey Ettinger, Hormel’s chief executive, said on a conference call with analysts on Wednesday that 55 farms that supply his company had been affected by bird flu, and that many of the supplier barns remain empty under quarantine, leading the company to project that Jennie O’s fiscal second-quarter sales volume could fall by 15%. The company also warned it expects full-year earnings to come in at the low end of its previous guidance of $2.50 to $2.60 a share due to bird flu.

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