For Cal-Maine Foods, the nation's largest egg
producer 2022 was a bit of an eggstravaganza.
What came first the chicken or the egg? Well, the
egg came first in this story. Cal-Maine Foods, the egg company
shares are soaring this year of 64%.
While, you paid $4.30 on average in December
2022 for a dozen eggs, compared to $1.80 in 2021 Cal-Maine
reported a nearly 32% increase in revenue and 2022 from 2021.
I think it's a testament to the fact that they
haven't had any outbreaks, how good they've been at biosecurity
in their facilities is a very experienced, very deep
management team that's been in this industry for a long time.
Eggs are an about $10 billion industry with nearly
13% growth annually and profit from 2017 to 2022. But it's also
a volatile one that's sensitive to market changes or
environmental factors. And of course, it's not one without
controversy. Each bird
is given less space than the dimensions of an iPad
on which to live her entire life. And so they have to eat,
sleep, defecate all in the same area, and they're denied
virtually everything that's natural to them.
Everyone tries to make money but it's a low margin. It's a very
low margin industry.
There are 373 million laying hens around the
United States as of January 2023. After hens lay eggs at a
farm, they get graded by the United States Department of
Agriculture and put into cartons sold to retailers and then
purchased by you, the consumer.
The egg industry has been a relatively low margin low
return business given that that producers are responsible for
rolling the hens keeping them fed, they're exposed to things
like corn and soybean costs. And so that's created a pretty
volatile margin structure and had relatively low margins over
time.
More than 9 billion eggs were produced in
the United States in December 2022. More than half of the eggs
produced are typically table eggs white eggs produced by
battery chickens. About 8% are brown 19% produced by cage free
chickens about 6% by organic free range and nearly 14% are
hatching eggs. Cal Maine foods, the only public egg producer
holds nearly 17% of market share. Like some of the other
larger companies it operates farms processing plants,
hatcheries, feed mills, warehouses, offices and other
properties around the country. The second largest producer is
Rose Acre Farms with about 7%. Then there's Versova holdings
and Hillandale farms with just more than 5% Each and Michael
foods with three and a half percent.
Eggs are a vertically integrated business. So the egg
producers control from the time that chick is hatched through
the end of one it can no longer lay eggs, right they control
that whole process. Once an egg is laid within two to three
days. It's on the shelf at your grocery store.
Cal-Maine Foods headquartered in Ridgeland,
Mississippi was founded in 1957. It has one operating segment,
which is the production grading packaging, marketing and
distribution of shell eggs. Integrated operations include
hatching chicks, growing and maintaining flocks of pullets
layers and breeders, manufacturing feed and
producing, processing, packaging and distributing shell eggs. As
of May 2022, the company had more than 42 million layers or
hens that lay eggs and 11 and a half million pullets and
breeders.
Prices are very dynamic. They move up and down
every single day. While Cal-Maine is probably the best
operator in its space and certainly has a great management
team. It's been a difficult stock because it's just it's so
volatile and so cyclical. A
volatile stock is driven by several factors,
company performance being one. In 2022 Cal-Maine revenue was at
its highest since 2016. After a steep drop in 2017 among other
factors as a result of the avian flu outbreak in 2015 revenue
increased in 2018, before beginning a steady decline
through the height of the pandemic. Between 2021 and 2022
revenue increased from 1.3 to $1.8 billion a 40% increase.
They are market takers right they will take what the
market is dictating. This is
on Angel Rubio, a senior analyst at Urner Barry, a
market research firm specializing in the wholesale
food industry.
because the market is dictating higher prices overall.
Cal-Maine said in its annual report that as of
July 2022, no bird flu had been detected at any of its
facilities as a result of the latest outbreak. Surging egg
prices helped drive Cal-Maine stock up almost 50% in 2022,
even as the s&p 500 fell 19%.
There's a massive wave of bird flu that's taking over
farms and wildlife centers. Across the country, millions and
millions of infected birds destroyed so far.
2022 was specifically an outlier year, probably this was the
highest price on record at the wholesale level and at the
consumer level as well.
More than 50 million birds have died since
the beginning of 2022 as a result of the deadliest outbreak
of avian flu in US history. The flu is lethal and kills 90 to
100% of chickens, often within 48 hours. As of January 2023,
the number of laying hens in the US is down 5% from the same time
in 2021, while the US also faced an outbreak in 2015. This time,
it's different.
In 2015, you had the outbreak for a couple of months,
but the outbreaks began after Easter, you didn't have corn
prices at above $5. You didn't have the war in Ukraine, you
didn't have inflationary pressures, the economy was
expanding in 2022 is still expanding, but there were the
prospects of a potential recession components are very
different in 2022. In addition to the fact that we have
multiple outbreaks throughout the year, so there hasn't even
been a seasonal recovery.
The US has lost around 43 million egg laying
hens about 10 or more percent of the population due to the
disease itself or depopulation since the outbreak began in
February 2022.
It's very significant when for every 1% of egg layers
lost prices would move about six to 7%. In some cases, even 8%.
But on average, it's about 6%. This time for every 1% layer
that we lost, prices went up about 15%. So that's significant
when we're talking about supply shocks between 2022 and 2015.
New regulations have gone into effect too, In
2016 Massachusetts voted question three also known as an
act to prevent cruelty to farm animals into law, the strongest
Farm Animal Protection Law in the US at the time. It made it
illegal for Massachusetts hens to be confined in such a way
that prevents the animal from lying down, standing up fully
extending its limbs or turning around freely.
The majority of hens on industrial egg farms, they're
confined to these cages called battery cages. If you look at a
sheet of paper, they have less space than that on which to live
their entire life.
In 2018, California voters approved a
similar law to the one in Massachusetts, proposition 12,
the farm animal confinement initiative, it requires that
covered animals including egg laying hens be housed in
confinement systems that comply with specific minimum standards
for freedom of movement, cage free design, and minimum floor
space. Both question three and proposition 12 went into effect
in January 2022.
Those are the only two states that require this. But
there are moves by many other states to eventually get to
that.
The Humane Society of the United States led the
campaigns to ban the use of cages in 11 states. In Ohio, not
all cages, but battery cages. Eight of those states also
banned the sale of eggs from cage facilities.
They have to get it from farms that are cage free,
which is driving the price off. So it's a disruption overall in
the market. And that's causing disruption in prices, but not
necessarily availability. But if you look at the prices to the
consumer, for instance, for cage free, and conventional eggs,
their spread between them is the smallest it has been because
they just need those eggs. And those that mandate those
requirements are pulling the cage free eggs into those
markets, which is causing those prices to move up.
To give time for producers to modify their
operations these laws are expected to go into effect in
the next few years.
The industry needs to convert a lot of its existing
capacity from caged eggs to cage free eggs and that's expensive
and requires a lot of time and effort.
In fiscal 2021 Cal-Maine announced its board of
directors approved several new capital projects estimated to
cost more than $100 million to expand the company's cage free
egg production capabilities. Cal-Maine said it plans to fund
these projects through available cash on hand investments and
operating cash flow.
They are converting their facilities to cage free
because they know there are companies that want to buy them
and they know that consumers want them as well.
A 2022 poll shows that 80% of all likely voters in
the US at least somewhat support Proposition 12. Retailers have
committed to only selling cage free eggs as well, including
Walmart, which has said it will do so by 2025.
The industry has an estimate that to convert from
conventional the cage free it's roughly $45 a bird and that
number is even stale relative to kind of what's happened with
costs in the past few years. So call it closer to 50 or $55 per
bird. So you know on a base of 325 million hens, you're
converting a big percentage you know you're talking from an
industry perspective like billions of dollars.
Meanwhile, in California, a state where
proposition 12 went into effect in 2022. The wholesale price
increase from 2020 is only 8 cents per dozen high feed prices
have also significantly affected margins. As layers mostly eat
corn
prices were already high from the end of 2020. Once
the war in Ukraine hit, it exacerbated this problem by not
letting prices correct downward as we produce corn here in the
US because remember, these egg laying facilities are in the
Corn Belt, because that's where corn is. And it's a massive
ingredient for feed. And it's a massive cost of production of
the overall industry. Oil prices, energy prices will be
impacted by that you have to be running the barns and their
energy intensive as well macroeconomic game indicators in
the case of inflation the same way.
To put it simply the industry is volatile -
prices react to what's happening in the world. The avian flu,
inflation, regulation changes, the war in Ukraine, tensions
between the U.S. and China, the Coronavirus pandemic, supply
chain issues and the cost of feed, labor, fuel and packaging
all impact the price of your egg sandwich and who's making the
most money off of your morning treat. In a statement to CNBC
Cal-Maine Foods said throughout our history, we've worked to
build a business model that can deal effectively with the
industry's inherent volatility...We strive to create
a "culture of sustainability" while creating value for
customers, shareholders, team members and communities. In the
next few years, the industry is expected to experience 1.2%
revenue growth due to steady upticks in egg prices, per
capita egg consumption and demand from chicken egg
production, economic or environmental factors could
change the outlook. And there is of course, the question of how
demand will shift based on changes in regulations
To the extent that there are now a bunch of
conventional white eggs that are kind of floating around the
market, you know, to those flooding into other states that
are you know, allowing conventional legs and kind of
depressed the pricing. I think it's I think we don't know yet
at this point. But it's it's definitely a risk that we're
watching very closely.
And with the avian flu wiping out more than 58
million birds, everyone is affected from the producer all
the way to the consumer.
I think about my local grocery store, knowing what I
know about the wholesale market being at that $5.50 cent plus
number that it was in December, they took a person's upselling.
But they didn't take it up to that full amount. So the grocers
were actually losing money on eggs. They're playing some
ketchup on it now. But I think on the reverse, they're going to
try and restore those margins, at least for a little bit on the
way back down. So they won't take the pricing down as as
quickly as it went up.
It's been an eggventful couple of years. But
experts aren't worried about the industry's future.
We have been in transition. So we don't know
what's going to be on the on the other side. But it's it's not
terrible, right? It's it's going to be we're going to be just
fine