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
