- Email: [email protected]
Egg prices, feed costs, and the decision to molt
RESEARCH NOTES Egg Prices, Feed Costs, and the Decision to Molt B. A. McDaniel and D. R. Aske1 *University of Northern Colorado, Department of Economics, Greeley, Colorado 80639 Ordinary least squares was used to test the relationship between the independent variables (egg, corn, and meal prices) and the dependent variable (percentage of layers in molt). In four of the five regions, there was a significant inverse relationship (P < 0.05) between egg prices and the percentage of layers in molt. This analysis suggests that producers were influenced by current egg prices when making the decision to molt. However, the relationship between the percentage of layers in molt and corn and meal prices was less clear. Although a positive relationship between feed prices and molt was found in each region, in only one region was the relationship statistically significant (P < 0.05).
(Key words: shell egg prices, egg production, layers, forced molting, regional egg pricing) 2000 Poultry Science 79:1242–1245
INTRODUCTION There have been enormous changes in the shell egg industry in the past 25 yr. Major changes include 1) genetic changes in the laying hen, including earlier sexual maturity, earlier peak production, longer laying cycles, higher postmolt production, and greater total number of egg per hen during any given laying cycle; 2) in-line shell egg grading for the majority of all eggs produced, creating a direct line from farm production to retail; 3) large, multimillion hen complexes as a standard in the industry; 4) advances in disease control, which more directly link chick hatch to total egg production; 5) fewer egg producers, allowing egg supply to be managed by fewer producers; 6) industry acceptance of Urner Barry publications as the single egg-pricing agent in the US; 7) the development of regional pricing of shell eggs in five regions in the US; and 8) the development and refinement of forced molting of layer flocks (McDaniel, 1991). The refinement of forced molting procedures has allowed molted hens to achieve production levels that approach within 5% of nonmolted peaks that typically exceed 90% per hen-day production levels. Commercial laying hens will each naturally molt on their own but
Received for publication April 8, 1999. Accepted for publication April 24, 2000. 1 To whom correspondence should be addresed: [email protected].
at various times over the total period the laying flock is housed. This variability creates an economic problem, as hens are fed when they are molting, and the flock’s natural molt cycle may be extended over many weeks or even months. An economic alternative developed in the 1960s, and refined in the 1970s and 1980s, is the procedure of forced molting (Moreng and Avens, 1985). This procedure rests all hens and then returns them to a more uniform high rate of lay for an extended period of 25 to 35 wk. Forced molting has come under attack for various reasons, including the possibility that it propagates an increased incidence of Salmonella enteritidis. However, it remains the only short-run instrument that shell egg producers have to adjust production in periods of falling or low shell egg prices. Any policy designed to eliminate the practice of forced molting needs to take into consideration the economic impact on shell egg producers. Without this short-run escape from economic losses, many egg producers would be forced to maintain production levels during periods of low and falling egg prices and might be forced through economic losses to leave the industry. This loss, in turn, would accelerate the recent trend of declining numbers of egg producers and further concentrate production toward larger but fewer egg producers. The demand for eggs has been very inelastic; therefore, a slight change in shell egg production results in a significantly larger change in shell egg prices (Miller and
1242
Downloaded from http://ps.oxfordjournals.org/ at West Virginia University on May 25, 2014
ABSTRACT On April 7, 1998, the United Poultry Concerns filed a petition with the Department of Health and Human Services of the Food and Drug Administration calling for the elimination of the practice of forced molting of laying hens in the US. In reaction to this petition, this study investigated the economic importance of forced molting as a short-term production management tool for egg producers. The relationship between shell egg prices and feed costs and the occurrence of forced molting in the five shell egg-pricing regions in the US was addressed. The purpose of this analysis was to determine whether forced molting is used to slow egg production during periods of falling or low egg prices or periods of high or rising feed costs.
1243
RESEARCH NOTE TABLE 1. Definitions of variables Midwest Molt Price Corn Meal Northeast Molt
Percentage of layers in forced molt in Illinois on the first day of the month. Urner Barry price quote for large white shell eggs in the midwest region for the last Wednesday of the previous month. Price of a bushel of corn in the Chicago market for the last Wednesday of the previous month. Price of 1 ton of soybean meal in the Chicago market for the last Wednesday of the previous month. Percentage of layers in forced molt in New York state on the first day of the month.
Price
Urner Barry price quote for large white shell eggs in the northeast region for the last Wednesday of the previous month.
Corn
Price of a bushel of corn in the Buffalo market for the last Wednesday of the previous month.
Meal
Price of 1 ton of soybean meal in the Buffalo market for the last Wednesday of the previous month. Percentage of layers in forced molt in Texas on the first day of the month.
Price
Urner Barry price quote for large white shell eggs in the south central region for the last Wednesday of the previous month.
Corn
Price of a bushel of corn in the Fort Worth market for the last Wednesday of the previous month. Price of 1 ton of soybean meal in the Fort Worth market for the last Wednesday of the previous month.
Meal Southern California Molt Price Corn Meal Southeast Molt Price Corn Meal
Percentage of layers in forced molt in California on the first day of the month. Urner Barry price quote for large white shell eggs in the southern California region for the last Wednesday of the previous month. Price of a bushel of corn in the Los Angeles market for the last Wednesday of the previous month. Price of 1 ton of soybean meal in the Los Angeles market for the last Wednesday of the previous month. Percentage of layers in forced molt in Georgia on the first day of the month. Urner Barry price quote for large white shell eggs in the southeast region for the last Wednesday of the previous month. Price of a bushel of corn in the Atlanta market for the last Wednesday of the previous month. Price of 1 ton of soybean meal in the Atlanta market for the last Wednesday of the previous month.
Masters, 1973). Don Bell (1996), poultry specialist for the extension service at the University of California, found that from 1983 to 1995, a 1% change in egg supply resulted in a 6% opposite change in egg prices.2 Therefore, historically, the egg supply and egg price relationship results in large swings between profit and losses for shell egg producers. For example, if break-even was a wholesale price of 6¢ per dozen eggs produced, a 1% increase in shell egg production would result in an industry-wide economic loss of approximately 6¢ per dozen for all eggs produced. Likewise, a similar decrease in production would result in 6¢ per dozen profit for all eggs produced. This profit or loss for a typical single producer with a complex of one million hens averaging 80% production would be $1.46 million annually. In the
2 Donald Bell, Cooperative Extension, University of California, Riverside, CA 92506.
final analysis, it is quite obvious that slight changes in total US egg production can have a very large impact on shell egg revenues for all egg producers (Roy and Johnson, 1973). The objective of this study was to determine if a relationship exists between egg prices or feed costs and molting.
MATERIALS AND METHODS The two main short-run variables that influence an egg producer’s profit margin are egg prices and feed costs. On the revenue side, if molting is used as a shortrun, decision-making option, producers would be less likely to molt chickens when egg prices are high and more likely to molt them when egg prices are low. Although seasonal prices vary, the response of producers regarding the decision to molt requires several months; therefore, seasonal prices were accounted for in the use
Downloaded from http://ps.oxfordjournals.org/ at West Virginia University on May 25, 2014
South Central Molt
1244
MCDANIEL AND ASKE TABLE 2. Estimates of price and feed costs as determinants of molting Dependent variable: molt1 region
Coefficient
Standard error
t-statistic
Midwest
Price Corn Meal Intercept
−13.179 0.451 0.009 13.584
5.633 0.891 0.015 3.784
−2.340* 0.506 0.587 3.590*
Northeast
Price Corn Meal Intercept Price Corn Meal Intercept Price Corn Meal Intercept Price Corn Meal Intercept
−5.031 0.452 0.001 3.764 −9.464 0.482 −0.001 10.995 −8.586 0.060 0.010 13.206 −5.557 0.520 0.009 4.588
1.501 0.210 0.004 1.007 2.170 0.305 0.006 1.514 3.401 0.319 0.013 2.944 3.310 0.445 0.008 2.344
−3.352* 2.148* 0.201 3.739* −4.362* 1.583 −0.028 7.262* −2.525* 0.188 0.752 4.486* −1.678 1.168 1.214 1.958
South Central
Southern California
Southeast
Molt = percentage of flock in molt. Price = regional price for large white shell eggs; Corn = regional price of a bushel of corn; and Meal = regional price of 1 ton of soybean meal. *P < 0.05. 1 2
of monthly price data. On the cost side, producers would be less likely to molt when feed costs are low and more likely to molt when feed costs are high.
Two Hypotheses Are Tested Hypothesis 1. There is an inverse relationship between the percentage of layers in molt on the first day of the month and egg prices at the end of the previous month. This hypothesis suggests that producers are influenced by current egg prices when making the decision to molt. Hypothesis 2. There is a direct relationship between the percentage of layers in molt on the first day of the month and the price of corn and soybean meal at the end of the previous month. In volume, soybean meal is about 20% of the total layer ration, and ground corn is about 70% of the ration. In a dollar value, soybean meal and ground corn are approximately 72% of the ration cost.3 Monthly data from January, 1994 to January, 1998 were used for this research. The price data came from Urner Barry’s price quotes of white, large, shell eggs.4 Molting data were from the National Agricultural Statistical Service (1998) reports of hens in a molt by state and month.5 Soybean meal prices and corn prices were obtained from Feedstuffs: The Weekly Newspaper for Agribusiness.
3
Creighton Brothers, Warsaw, IN 46580. United Egg Producers, Atlanta, GA 30350. National Agricultural Statistical Service, Washington, DC 20250.
4 5
The incidence of molting, egg prices, and feed costs vary by region; therefore, the hypotheses were tested in five different regions. The regions were based on the five Urner Barry pricing regions. The regions were the Midwest, Northeast, South Central, Central California, and the Southeast. The molt variable measured the percentage of layers in forced molt on the first day of each month for a selected state within each region. Some states had so few producers that any use of data would reveal confidential information of private firms and, therefore, cannot be released. The model assumed that each region contained a sufficiently varied layer flock so that an adequate number of layers could at any time be force-molted. Data for a state in each region were matched with available grain prices for a major city in that state as reported by Feedstuffs. The price variable measured the Urner Barry price quote of eggs from the last Wednesday of the previous month. The corn variable measured the price of a bushel of corn in a selected market within the state for which the molting data was obtained. The meal variable measured the price of 1 ton of soybean meal in a selected market within the state for which the molting data was obtained. The corn and meal variables were also measured from the last Wednesday of the previous month. The definitions, specified state, and markets for each regional variable are given in Table 1. Least squares regression analysis was used to test the two hypotheses. The t-statistic, which is computed as the ratio of an estimated coefficient to its standard error, was used to test if the estimated coefficients for each independent variable were significantly different from zero (Quantitative Micro Software, 1994–1997). The sig-
Downloaded from http://ps.oxfordjournals.org/ at West Virginia University on May 25, 2014
Variable2
1245
RESEARCH NOTE
nificance of each independent variable was based on the estimated coefficient not being equal to zero at the 95% probability confidence level (P < 0.05). Molt was the dependent variable, and price, corn, and meal were the independent variables. The results of the estimation for each region are given in Table 2.
low or falling egg prices. If the egg industry is expected to operate in an atmosphere of free enterprise in which supply and demand establish the market price, then egg producers should be allowed to use molting to alter the supply of eggs in the short term.
REFERENCES RESULTS AND DISCUSSION
Bell, D., 1996. An egg economics update. Cooperative Extension, University of California 185:1–4. Feedstuffs: The Weekly Newspaper for Agribusiness. The Miller Publishing Company, Minnetonka, MN. McDaniel, B. A., 1991. Maintaining profits in a declining margin industry: Analyzing profits in the U.S. egg industry. Pages 21–33 in: Proceedings of the 11th Annual Australian Egg Industry Conference, Melbourne, Australia. Miller, B. R., and G. C. Masters, 1973. A short-run price prediction model for eggs. Am. J. Agric. Econ. 55:484–488. Moreng, R. W., and J. S. Avens, 1985. Poultry Science and Production. Reston Publishing Co., Reston, VA. National Agricultural Statistical Service, 1998. Chicken and Egg Annual. Washington, DC. Quantitative Micro Software, 1994–1997, Eviews User’s Guide: Eviews3. Quantitative Micro Software, Irvine, CA. Roy, S. K., and P. N. Johnson, 1973. Econometric models for quarterly shell egg prices. Am. J. Agric. Econ. 55:209–213.
Downloaded from http://ps.oxfordjournals.org/ at West Virginia University on May 25, 2014
Our results support Hypothesis 1. The price variable coefficients were negative and significant (P < 0.05) in four of the five pricing regions. The results suggest that egg prices influence egg producer decisions to molt laying flocks. The results were less clear regarding Hypothesis 2. Although the signs on the corn variable coefficients were all positive, and four of the five coefficients on the meal variable were also positive, only the corn variable in the Northeast region was significant (P < 0.05). Clearly, egg producers have very limited control of egg production in the short term. One of the few options available to the egg producer is the choice to molt hens in an attempt to decrease total production in periods of
(Key words: shell egg prices, egg production, layers, forced molting, regional egg pricing) 2000 Poultry Science 79:1242–1245
INTRODUCTION There have been enormous changes in the shell egg industry in the past 25 yr. Major changes include 1) genetic changes in the laying hen, including earlier sexual maturity, earlier peak production, longer laying cycles, higher postmolt production, and greater total number of egg per hen during any given laying cycle; 2) in-line shell egg grading for the majority of all eggs produced, creating a direct line from farm production to retail; 3) large, multimillion hen complexes as a standard in the industry; 4) advances in disease control, which more directly link chick hatch to total egg production; 5) fewer egg producers, allowing egg supply to be managed by fewer producers; 6) industry acceptance of Urner Barry publications as the single egg-pricing agent in the US; 7) the development of regional pricing of shell eggs in five regions in the US; and 8) the development and refinement of forced molting of layer flocks (McDaniel, 1991). The refinement of forced molting procedures has allowed molted hens to achieve production levels that approach within 5% of nonmolted peaks that typically exceed 90% per hen-day production levels. Commercial laying hens will each naturally molt on their own but
Received for publication April 8, 1999. Accepted for publication April 24, 2000. 1 To whom correspondence should be addresed: [email protected].
at various times over the total period the laying flock is housed. This variability creates an economic problem, as hens are fed when they are molting, and the flock’s natural molt cycle may be extended over many weeks or even months. An economic alternative developed in the 1960s, and refined in the 1970s and 1980s, is the procedure of forced molting (Moreng and Avens, 1985). This procedure rests all hens and then returns them to a more uniform high rate of lay for an extended period of 25 to 35 wk. Forced molting has come under attack for various reasons, including the possibility that it propagates an increased incidence of Salmonella enteritidis. However, it remains the only short-run instrument that shell egg producers have to adjust production in periods of falling or low shell egg prices. Any policy designed to eliminate the practice of forced molting needs to take into consideration the economic impact on shell egg producers. Without this short-run escape from economic losses, many egg producers would be forced to maintain production levels during periods of low and falling egg prices and might be forced through economic losses to leave the industry. This loss, in turn, would accelerate the recent trend of declining numbers of egg producers and further concentrate production toward larger but fewer egg producers. The demand for eggs has been very inelastic; therefore, a slight change in shell egg production results in a significantly larger change in shell egg prices (Miller and
1242
Downloaded from http://ps.oxfordjournals.org/ at West Virginia University on May 25, 2014
ABSTRACT On April 7, 1998, the United Poultry Concerns filed a petition with the Department of Health and Human Services of the Food and Drug Administration calling for the elimination of the practice of forced molting of laying hens in the US. In reaction to this petition, this study investigated the economic importance of forced molting as a short-term production management tool for egg producers. The relationship between shell egg prices and feed costs and the occurrence of forced molting in the five shell egg-pricing regions in the US was addressed. The purpose of this analysis was to determine whether forced molting is used to slow egg production during periods of falling or low egg prices or periods of high or rising feed costs.
1243
RESEARCH NOTE TABLE 1. Definitions of variables Midwest Molt Price Corn Meal Northeast Molt
Percentage of layers in forced molt in Illinois on the first day of the month. Urner Barry price quote for large white shell eggs in the midwest region for the last Wednesday of the previous month. Price of a bushel of corn in the Chicago market for the last Wednesday of the previous month. Price of 1 ton of soybean meal in the Chicago market for the last Wednesday of the previous month. Percentage of layers in forced molt in New York state on the first day of the month.
Price
Urner Barry price quote for large white shell eggs in the northeast region for the last Wednesday of the previous month.
Corn
Price of a bushel of corn in the Buffalo market for the last Wednesday of the previous month.
Meal
Price of 1 ton of soybean meal in the Buffalo market for the last Wednesday of the previous month. Percentage of layers in forced molt in Texas on the first day of the month.
Price
Urner Barry price quote for large white shell eggs in the south central region for the last Wednesday of the previous month.
Corn
Price of a bushel of corn in the Fort Worth market for the last Wednesday of the previous month. Price of 1 ton of soybean meal in the Fort Worth market for the last Wednesday of the previous month.
Meal Southern California Molt Price Corn Meal Southeast Molt Price Corn Meal
Percentage of layers in forced molt in California on the first day of the month. Urner Barry price quote for large white shell eggs in the southern California region for the last Wednesday of the previous month. Price of a bushel of corn in the Los Angeles market for the last Wednesday of the previous month. Price of 1 ton of soybean meal in the Los Angeles market for the last Wednesday of the previous month. Percentage of layers in forced molt in Georgia on the first day of the month. Urner Barry price quote for large white shell eggs in the southeast region for the last Wednesday of the previous month. Price of a bushel of corn in the Atlanta market for the last Wednesday of the previous month. Price of 1 ton of soybean meal in the Atlanta market for the last Wednesday of the previous month.
Masters, 1973). Don Bell (1996), poultry specialist for the extension service at the University of California, found that from 1983 to 1995, a 1% change in egg supply resulted in a 6% opposite change in egg prices.2 Therefore, historically, the egg supply and egg price relationship results in large swings between profit and losses for shell egg producers. For example, if break-even was a wholesale price of 6¢ per dozen eggs produced, a 1% increase in shell egg production would result in an industry-wide economic loss of approximately 6¢ per dozen for all eggs produced. Likewise, a similar decrease in production would result in 6¢ per dozen profit for all eggs produced. This profit or loss for a typical single producer with a complex of one million hens averaging 80% production would be $1.46 million annually. In the
2 Donald Bell, Cooperative Extension, University of California, Riverside, CA 92506.
final analysis, it is quite obvious that slight changes in total US egg production can have a very large impact on shell egg revenues for all egg producers (Roy and Johnson, 1973). The objective of this study was to determine if a relationship exists between egg prices or feed costs and molting.
MATERIALS AND METHODS The two main short-run variables that influence an egg producer’s profit margin are egg prices and feed costs. On the revenue side, if molting is used as a shortrun, decision-making option, producers would be less likely to molt chickens when egg prices are high and more likely to molt them when egg prices are low. Although seasonal prices vary, the response of producers regarding the decision to molt requires several months; therefore, seasonal prices were accounted for in the use
Downloaded from http://ps.oxfordjournals.org/ at West Virginia University on May 25, 2014
South Central Molt
1244
MCDANIEL AND ASKE TABLE 2. Estimates of price and feed costs as determinants of molting Dependent variable: molt1 region
Coefficient
Standard error
t-statistic
Midwest
Price Corn Meal Intercept
−13.179 0.451 0.009 13.584
5.633 0.891 0.015 3.784
−2.340* 0.506 0.587 3.590*
Northeast
Price Corn Meal Intercept Price Corn Meal Intercept Price Corn Meal Intercept Price Corn Meal Intercept
−5.031 0.452 0.001 3.764 −9.464 0.482 −0.001 10.995 −8.586 0.060 0.010 13.206 −5.557 0.520 0.009 4.588
1.501 0.210 0.004 1.007 2.170 0.305 0.006 1.514 3.401 0.319 0.013 2.944 3.310 0.445 0.008 2.344
−3.352* 2.148* 0.201 3.739* −4.362* 1.583 −0.028 7.262* −2.525* 0.188 0.752 4.486* −1.678 1.168 1.214 1.958
South Central
Southern California
Southeast
Molt = percentage of flock in molt. Price = regional price for large white shell eggs; Corn = regional price of a bushel of corn; and Meal = regional price of 1 ton of soybean meal. *P < 0.05. 1 2
of monthly price data. On the cost side, producers would be less likely to molt when feed costs are low and more likely to molt when feed costs are high.
Two Hypotheses Are Tested Hypothesis 1. There is an inverse relationship between the percentage of layers in molt on the first day of the month and egg prices at the end of the previous month. This hypothesis suggests that producers are influenced by current egg prices when making the decision to molt. Hypothesis 2. There is a direct relationship between the percentage of layers in molt on the first day of the month and the price of corn and soybean meal at the end of the previous month. In volume, soybean meal is about 20% of the total layer ration, and ground corn is about 70% of the ration. In a dollar value, soybean meal and ground corn are approximately 72% of the ration cost.3 Monthly data from January, 1994 to January, 1998 were used for this research. The price data came from Urner Barry’s price quotes of white, large, shell eggs.4 Molting data were from the National Agricultural Statistical Service (1998) reports of hens in a molt by state and month.5 Soybean meal prices and corn prices were obtained from Feedstuffs: The Weekly Newspaper for Agribusiness.
3
Creighton Brothers, Warsaw, IN 46580. United Egg Producers, Atlanta, GA 30350. National Agricultural Statistical Service, Washington, DC 20250.
4 5
The incidence of molting, egg prices, and feed costs vary by region; therefore, the hypotheses were tested in five different regions. The regions were based on the five Urner Barry pricing regions. The regions were the Midwest, Northeast, South Central, Central California, and the Southeast. The molt variable measured the percentage of layers in forced molt on the first day of each month for a selected state within each region. Some states had so few producers that any use of data would reveal confidential information of private firms and, therefore, cannot be released. The model assumed that each region contained a sufficiently varied layer flock so that an adequate number of layers could at any time be force-molted. Data for a state in each region were matched with available grain prices for a major city in that state as reported by Feedstuffs. The price variable measured the Urner Barry price quote of eggs from the last Wednesday of the previous month. The corn variable measured the price of a bushel of corn in a selected market within the state for which the molting data was obtained. The meal variable measured the price of 1 ton of soybean meal in a selected market within the state for which the molting data was obtained. The corn and meal variables were also measured from the last Wednesday of the previous month. The definitions, specified state, and markets for each regional variable are given in Table 1. Least squares regression analysis was used to test the two hypotheses. The t-statistic, which is computed as the ratio of an estimated coefficient to its standard error, was used to test if the estimated coefficients for each independent variable were significantly different from zero (Quantitative Micro Software, 1994–1997). The sig-
Downloaded from http://ps.oxfordjournals.org/ at West Virginia University on May 25, 2014
Variable2
1245
RESEARCH NOTE
nificance of each independent variable was based on the estimated coefficient not being equal to zero at the 95% probability confidence level (P < 0.05). Molt was the dependent variable, and price, corn, and meal were the independent variables. The results of the estimation for each region are given in Table 2.
low or falling egg prices. If the egg industry is expected to operate in an atmosphere of free enterprise in which supply and demand establish the market price, then egg producers should be allowed to use molting to alter the supply of eggs in the short term.
REFERENCES RESULTS AND DISCUSSION
Bell, D., 1996. An egg economics update. Cooperative Extension, University of California 185:1–4. Feedstuffs: The Weekly Newspaper for Agribusiness. The Miller Publishing Company, Minnetonka, MN. McDaniel, B. A., 1991. Maintaining profits in a declining margin industry: Analyzing profits in the U.S. egg industry. Pages 21–33 in: Proceedings of the 11th Annual Australian Egg Industry Conference, Melbourne, Australia. Miller, B. R., and G. C. Masters, 1973. A short-run price prediction model for eggs. Am. J. Agric. Econ. 55:484–488. Moreng, R. W., and J. S. Avens, 1985. Poultry Science and Production. Reston Publishing Co., Reston, VA. National Agricultural Statistical Service, 1998. Chicken and Egg Annual. Washington, DC. Quantitative Micro Software, 1994–1997, Eviews User’s Guide: Eviews3. Quantitative Micro Software, Irvine, CA. Roy, S. K., and P. N. Johnson, 1973. Econometric models for quarterly shell egg prices. Am. J. Agric. Econ. 55:209–213.
Downloaded from http://ps.oxfordjournals.org/ at West Virginia University on May 25, 2014
Our results support Hypothesis 1. The price variable coefficients were negative and significant (P < 0.05) in four of the five pricing regions. The results suggest that egg prices influence egg producer decisions to molt laying flocks. The results were less clear regarding Hypothesis 2. Although the signs on the corn variable coefficients were all positive, and four of the five coefficients on the meal variable were also positive, only the corn variable in the Northeast region was significant (P < 0.05). Clearly, egg producers have very limited control of egg production in the short term. One of the few options available to the egg producer is the choice to molt hens in an attempt to decrease total production in periods of