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Supermarkets Accused Of Displaying A 'Criminal' Lack Of Understanding

by 5m Editor
22 October 2007, at 12:09pm

UK - For months, egg producers have been having sleepless nights over feed prices; yet still it seems that the supermarkets have failed to grasp the full extent of the problems that the industry is currently trying to contend with. UK Farming asks how can retailers fail to appreciate the gravity of the situation, when the stark economic facts of the feed price crisis are known by all?

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the price of my feed has risen by £50 per ton and yet, to date, I have received no increase in the price of my eggs.

Tom Vesey

That is the question that producers are asking; and in the absence of any meaningful response – in the form of a realistic increase in the price of eggs paid to the producer – there is a real risk that producers' confidence in the future will be destroyed, leaving the industry in tatters.

With the increase in feed prices driving up costs right across the industry, the primary producer is suffering most, simply because the price he receives for his eggs has not risen in proportion to the price he is currently paying out for feed, and therefore no longer reflects the true cost of production. Readers will recall Tom Vesey's comments on the feed price crisis in the August edition of The Ranger, and his update on the situation earlier this month is as follows: "Since then the price of my feed has risen by £50 per ton and yet, to date, I have received no increase in the price of my eggs.

BFREPA has produced up to date costings which show that all producers are currently losing over £2.00 per bird. This is not sustainable."

ANAYLSIS OF INCREASED COSTS
BFREPA's latest breakdown of the operating budget for a flock of 12,000 birds over a 58-week cycle is based on feed costs of £225/ton, and on this basis, feed accounts for well over 50 per cent of total production costs (feed costs = 47.2p per dozen eggs, total production costs = 85.98p per dozen eggs, feed costs as a percentage of total = 55%). And this is not the whole story, because increases incurred by other parts of the industry will also be filtered down to the producer, although the impact may not be felt until he buys his next flock and finds that pullet prices have risen.

Steve Carlyle, of Lloyds Animal Feeds, had calculated how the additional costs mount up at each stage of the flock's lifecycle. Earlier this month he summarised the position as follows: "Every £5 movement in feed prices to the producer results in an increase in production costs of 1p per dozen. So far this year we are looking at increases in excess of £60, and prices are still going up. That represents a cost increase of 12p per dozen.

"Then there's the extra cost of rearing the pullets. A £10 movement in feed puts 6p on the cost of a pullet. This has resulted in an increase in the year to date of 25p per pullet, i.e. a further 1p per dozen. "Add to that another 4p increase in chick price, plus other costs, and we already need an increase of 15p per dozen just to stand still." Since Steve gave us these figures, prices have spiralled still higher.

INCREASE NEEDED TO RESTORE THE DIFFERENTIAL
In order for the producer to net an increase of 15p a dozen, the price on the shelves could have to go up by significantly more – perhaps by three or four times as much – because traditionally supermarkets have a policy of linking prices to profits. Thus, it can happen that only a proportion of the retail price increase is passed on to the producer. In the present circumstances producers may well find it hard to see how the supermarkets would justify keeping any of the increase, since this price rise is not going to result in any increase in profits for the producer – at best, it will restore the income/expenditure differential and bring their profit margin back to its former level. It is the producer who has had to meet extra production costs, and will continue to have to do so; there has been no increase in the supermarkets' overheads.

Tom Vesey sums up the frustration of producers when he says: "All we're asking for is a price that enables us to produce eggs and gives us a fair return. If, in the future, costs decrease then so will the price of eggs, and that is simple economics. But when costs increase then prices must keep pace to allow producers to survive."

There may at last be a glimmer of light at the end of the tunnel. As this issue of The Ranger goes to press, two of the major retailers have implemented significant retail increases, believed to be in the region of 10p on the shelf price of a six pack and between 15p and 20p on the dozen; however, negotiations are still ongoing and the final details are not yet known. Geoff Cooper, of Noble Foods, commented: "We are delighted to see there are significant increases in retail prices. These moves give us the confidence that retailers have recognised the need for improved producer returns."

PRODUCERS CANCELLING PULLET ORDERS
Some may feel that this recognition is long overdue. Already there are reports of producers cancelling pullet orders and dropping out of the market, and many more will be thinking very carefully before placing their next flock on order. Geoff Cooper said: "Many of our producers are understandably concerned about their current returns and decisions regarding new flocks are particularly difficult in the current climate.

However, I am confident we will see returns improved to sustainable levels in the near future "Producers must be able to make sustainable returns, because we need them to be in a position where they can invest in order to grow in the future."

Tom Vesey has calculated that it will cost him the best part of £50,000 to restock his 16,000 bird house. "I just have time to cancel them, and I am very tempted. I will save the cost of the pullets, let the building for storage and enjoy an easy year while the present situation continues. There is absolutely no incentive for me to embark on another 13 months round of seven days a week drudgery.

Already other producers are cancelling their birds, and I don't blame them." If the Chairman of BFREPA is talking about cancelling his next flock, it really is time for the retailers to face up to the reality of the situation and realise not what the consequences might be, but what they will be, unless something is done quickly to restore profitability for the producer.

Already there has been talk of egg rationing in the run-up to Christmas, traditionally the time of year when egg sales increase dramatically, by as much as 50%. An egg shortage now would be disastrous when demand is high, and in particular, demand for British Free Range eggs. As Tom points out, we have up to now been in a period of growth for Free Range eggs. The marketing efforts of the Free Range industry and the quality assurances provided by the Lion Code have succeeded in raising customer awareness and winning consumer confidence. Customers feel comfortable buying British Free Range because they like the fact that they are buying into high standards of animal welfare and getting a wholesome, nutritional product with low food miles. With the message being reinforced by other sectors of British farming, these values have become important to consumers, so that today's consumer is far less inclined to buy on price alone. All this makes the retailers' apparent reluctance to assist Free Range producers even harder to understand, as it appears to contradict their own best marketing interests.

"I believe that consumers do want to buy British," asserts Tom. "However, there really will be a shortage of British Free Range eggs soon unless the price rises very dramatically.

Unlike the dairy industry, we work from crop to crop and so do not have the problem of selling cows in a depressed market. The drop in supply of eggs could occur very quickly – and it won't be made up by imports, for the enormous rise in wheat and soya prices is worldwide.

REPERCUSSIONS ACROSS THE INDUSTRY
The vast majority of large producers are entirely dependent on the outcome of price negotiations between the packers and the retailers.

But the supermarkets' decision on prices also places constraints on the small scale producers who use alternative marketing channels such as farm gate sales, farmers' markets and local retail outlets. Although theoretically they can increase the prices they charge whenever they wish, in practice they find it very difficult to add more than a few pence when the supermarket shelf price is not going up. One small producer who has a village farm near Middlesbrough and sells the majority of his eggs at the farm gate, explains that he is dependent on maintaining his core of regular customers for his income. "We are always very conscious of the fact that our customers have to come to us," he told The Ranger. "Many of them have told us that the reason they buy from us is firstly that they enjoy the eggs, and also because they know that all the eggs we sell have been freshly collected – but at the end of the day, price is always a factor for consumers, and if we didn't keep our prices a few pence lower than in the supermarkets, our customers might decide it wasn't worth making the journey. We just can't take that risk."

So the supermarkets' reluctance to allow prices to keep up with production costs is having repercussions across the whole of the industry. "Retailers have got to understand this.

None of us is in business for our health," Tom Vesey stresses. "If we don't receive a reasonable return for the considerable capital invested, we just won't continue. I know that primary producers are always at the end of the line. Everyone else above them takes the profit and the primary producer is left to pick up what remains at the end. We have to work with a degree of confidence. Once that is lost and people have gone out of production, it will take a long time to recover."

The situation will come as a particularly bitter blow to the many farmers who have come into Free Range over the last few years as refugees from the dairy industry, attracted by Free Range's track record of growth based on its ability to meet the customer's agenda for healthy, traceable foods produced to high standards of animal welfare.

A RIDICULOUS SITUATION
"Free Range eggs have been the great agricultural success story over the past ten to twelve years," Tom points out. "In the first instance we are entirely unsubsidised. Secondly, we have responded to the market and have produced a product that the consumers want, and at the right price. Thirdly, we have increased production as demand has increased.

Consumers can buy British Free Range eggs with confidence because through the Lion scheme we have a guarantee of best practice All this is now in danger of being ruined. It is a ridiculous situation."

A ridiculous situation it may be, but it is also a situation that can only get worse if the retailers persist in turning a blind eye to the plight of producers. "Feed prices are still going up," Steve Carlyle confirmed grimly, earlier this month. "Compounders have increased prices this month by £24 a ton." With prices fluctuating as wildly as they are at present, it is impossible to predict what will happen in the short term, let alone the medium to long term.

Recently there have been a one or two signs of prices beginning come down, but the chances of a dramatic overnight reversal of the upward trend are slim, because the factors that lie behind the increase in prices – the failure of the Australian crop, the increased demand in China, the impact farmers switching to biofuel production, the unknown effects of global warming on climate change – are still present and may continue to overshadow the market for some time to come.

CALL FOR UNITED APPROACH
Steve Carlyle insists that this crisis can be turned into a positive force. "There is an opportunity here to reach a better understanding with the retailers, and we need to take this opportunity by the horns," he said. "We need to drive the supermarkets towards a greater recognition of the needs of the producers, and this will stand us in good stead in the future." Everybody in the industry will echo this sentiment; but the question is, how?

Tom Vesey has realistic views on this matter, and he has a message that he hopes all BFREPA members will hear. "I don't believe in direct physical action outside supermarkets – it achieves nothing and annoys our ultimate customers. No-one is in the least bit interested in whether or not I go bankrupt. All they care about is whether they can buy their eggs. "I do believe in pressure, and I would urge all producers to write to your packer in the strongest possible terms, stressing the problems you're facing and the very real threat of being unable to continue. Please do so TODAY. I am receiving calls from members daily, telling me of their plight and urging me to do something, Pressure is what is needed from all of us. Maybe the retailers will then start to take notice. If they don't, they will have killed the industry – and that would be criminal."

5m Editor