Egg farm profitability
Just like any business, the egg industry needs to be profitable in order to be sustainable.
Like any business, egg farms need to be profitable in order to be sustainable. While the process of egg farming has a constancy to it in terms of input costs and sales revenue, there is considerable market volatility that makes long term profitability challenging to manage.
This is because egg farming at a medium to large scale is relatively inflexible, requiring substantial fixed cost investment in infrastructure up-front with the expectation that it will be utilised over long time frames of 20 or more years. This leaves egg farmers susceptible to short term changes such as the loss of a supply contract or longer term shifts in consumer demand, such as movement from one production system to another.
This process is managed through an industry that is constantly evolving by making new investments to meet anticipated future demand, while existing infrastructure moves through its useful life.
The result is a process where holistic change is impossible but incremental change is the norm as egg farmers take into account the direction of the market and plan their next steps toward it.
An example of this has been the expansion of free range production over the past 15 years which has gone from a specialty segment to the largest grocery retail segment.
Over this period, egg farmers received clear and consistent market signals that additional capacity was required and they responded accordingly. However, this process involves risk and can be difficult where community expectations are not closely aligned with consumer demand and messages are mixed.
The egg industry does not currently have the ability to capture information on the profitability of particular egg farms and there are likely to be obstacles to developing processes to do so. However, there are key indicators of industry performance that can be useful in assessing the operating conditions of egg farms as they relate to profitability.
The first relates to the extent to which the market is growing, which may drive consumption beyond supply and increase egg prices and profitability. Over the past 10 years egg consumption has grown consistently from 194 eggs per person in 2009 to 245 in 2018 which has created a buoyant market in which to invest. However, for compliance reasons, it is not possible to coordinate investment decisions and there remains a prospect of under or over-investment.
Another indicator of industry financial performance are input costs in the form of feed grain. Feed forms 65% of the variable costs of an egg farming business such that fluctuations in grain availability and price can have a substantial impact on profitability. This is currently a major issue for the egg industry with the drought in the Eastern states imposing feed grain increases from approximately $250 per tonne to over $500 per tonne. While input costs could be expected to reduce as climate conditions normalise, the impact on egg farming businesses is severe and can have long term consequences.
Long term planning and resilience is necessary to overcome fluctuating egg farm and industry profitability.
Agriculture is plagued by significant risks and egg farmers are not immune to this. Production issues such as food safety, animal welfare and biosecurity can have catastrophic impacts on an egg farming business, collapsing supply or sales for an extended period.
There are also industry-wide impacts from any serious incidents that could change public perceptions in relation to egg consumption.
Egg farmers also face market risks from changing consumer demand, community expectations, competition and customer market power.
These factors create a cycle of fluctuating egg farm and industry profitability that requires long term planning and resilience. Egg farmers generally negotiate this dynamic based on experience although there is likely to be scope for more objective industry information to be produced to assist with this.
The egg industry puts a lot of effort into managing production risks in order to protect farming businesses and the reputation of the industry. In most cases these issues are not insurable and steps must be taken to avoid incidents occurring. A key element of this process is the egg industry quality assurance scheme, Egg Standards of Australia (ESA). ESA sets out a broad range of production standards for rearing and laying hens and grading floor operation that relate to food safety, animal welfare, biosecurity and environmental management. ESA accreditation is done by independent certification bodies to allow egg farmers to demonstrate compliance with these standards.
Egg farmers have faced the pressure of competition since deregulation and this has played a significant role in driving efficient production. Some steps have been taken to increase transparency of egg markets but these are generally limited to monitoring the chicks hatched by hatcheries as an indicator of egg supply and the tracking of retail grocery egg sales.
In addition, consumer and community research can be conducted to provide insights to egg farmers in planning their businesses.
Explore metrics for industry performance and analysis
Develop enhanced risk assessment and management tools