The move by the nation’s largest egg producer to revamp some hen houses underscores a broader industry shift toward cage-free eggs.
Cal-Maine Foods Inc., the nation’s largest egg producer, is facing rising capital costs as it revamps its hen houses and builds new ones to meet a growing demand for cage-free eggs.
The company last week said it would invest $82 million to expand production of cage-free eggs in Delta, Utah, and Guthrie, Ky. The Ridgeland, Miss.-based company said it plans to fund the projects with existing cash. It reported $96.7 million in cash and short-term investments as of Feb. 26, compared with $169.5 million at the end of its prior fiscal year on May 29, 2021. The decline was due in part to capital spending, the company said.
Cal-Maine’s planned investment underscores a broader shift among egg producers toward cage-free eggs, spurred in part by a wave of state-level mandates and voluntary commitments by retailers and restaurant chains to stop buying eggs from caged hens. Earlier this year, laws took effect in California and Massachusetts requiring that all eggs sold in those states come from cage-free hens.
As of last month, about one third of hens raised to lay eggs in the U.S—a layer flock that totals about 322 million birds—was cage free, roughly on par with a year earlier but up sharply compared with 2018 when cage-free hens accounted for 18% of the total U.S. flock, according to the U.S. Department of Agriculture. The remainder of the U.S. layer flock was raised in cages. Hens that produce eggs labeled as cage free must be given unlimited access to food and water, and must have freedom to roam inside a production facility, according to the USDA.
Cal-Maine since 2008 has allocated about $625 million toward cage-free egg production, including its latest investment, accounting for about 40% of its total capital budget over that time. Over the past five years, spending on cage-free facilities has accounted for about 70% of the company’s total capital budget, Chief Financial Officer Max Bowman said.
Cal-Maine CFO Max Bowman.
Photo: Gil Ford Photography
“Our job is to produce what our customers—and our customers are retail customers—and what the ultimate consumer wants. And a lot of that is cage-free today,” Mr. Bowman said.
Cal-Maine produced 264.4 million dozens of eggs, a standard industry metric, during the quarter ended Feb. 26, or about 7% more than a year earlier. Specialty eggs—a category that includes cage-free, organic and brown eggs—accounted for about a third of total volume of eggs sold, compared with 27.4% during the prior-year period.
During the quarter, 24% of revenue generated by the sale of shell eggs were cage-free eggs, according to the company. In addition to shell eggs, the company sells egg products in frozen and liquid form.
In addition to California and Massachusetts, seven states—Nevada, Oregon, Washington, Colorado, Michigan, Utah and Rhode Island—have similar policies that are set to take effect in the coming years, according to the United Egg Producers, a trade group.
The state policies follow a wave of voluntary commitments by large grocery chains and food-service companies. For instance, Walmart Inc. —one of Cal-Maine’s largest customers—committed in 2016 to selling only cage-free eggs by 2025. Several other retailers and food chains, including Target Corp. and Kroger Co. , made similar commitments.
After years of corporate pledges and political campaigns, the shift toward cage-free egg production is now taking place on a large scale, the Humane League and the Humane Society of the United States, two animal-rights groups, said. “Now we’re seeing the implementation of it,” said Josh Balk, vice president for farm-animal protection at the Humane Society, which is pushing for state-level policy changes.
The transition to cage-free facilities is costly for egg producers and requires coordination with customers to make sure that producers meet their demands, said Chad Gregory, president and chief executive of the United Egg Producers, a trade group. The trade group’s members support all types of hen housing, he said.
“The whole industry has to afford these kinds of capital investments, and someone is going to have to pay for it,” said Adam Samuelson, lead analyst for the agribusiness sector at Goldman Sachs Group Inc., adding that the costs will eventually be passed on to consumers in the form of higher prices.
The price of eggs has jumped in recent months following an outbreak of avian influenza, which has resulted in the deaths of millions of birds. Shell-egg prices last week rose to $2.88 a dozen, up about 52% since Feb. 8, when the USDA confirmed the first case of the disease in a U.S. commercial turkey flock in Indiana.
Cal-Maine’s facilities, which are primarily located in the southern U.S., haven’t been affected by the disease yet, according to Mr. Bowman.
In addition to higher capital costs for building facilities, production costs for cage-free eggs are generally higher than for conventional eggs due to higher feed costs—the birds are more active and therefore need more calories—as well as higher facility costs because it takes more people to run a cage-free facility. Mortality rates for cage-free birds are generally higher, according to Mr. Bowman.
Consumers, however, are willing to pay more for cage-free eggs, said Carson Barnes, a senior analyst for agriculture and protein at research firm Consumer Edge Research LLC. “This is a category where consumers still aren’t afraid to pay for premium eggs,” he said.
Higher egg prices, as well as an ongoing shift in production toward specialty eggs, boosted Cal-Maine’s net sales, which rose 33% during the quarter ended Feb. 26, to $477.5 million. The company earned $39.5 million, compared with $13.5 million a year earlier.
Under the investments announced last week, Cal-Maine will build four new cage-free hen houses and convert two pullet houses in Utah for a total capacity of 810,000 cage-free layer hens. It also will convert nine layer-hen houses and two pullet houses in Kentucky that will result in a total capacity of 953,000 cage-free hens. The projects are expected to be completed by the spring of 2025.
Source: Wall Street Journal
