Recouping the costs of free-range eggs

Thursday, 23 October, 2014



Free-range eggs currently account for over 20% of the 4 billion eggs produced in Australia each year. A recent IBISWorld report analyses how the various operators along the supply chain will take advantage of the trend.

Category 2009-10 2014-15 5-year annualised growth
Australian egg production (in millions of eggs)
Cage 2548 2798 1.9%
Free-range 415 840 15.1%
Barn-laid 70 312 34.8%
Organic 11 78 48.0%
Specialty 7 15 16.5%
Total 3051 4043 5.8%

Over the five years through 2014-15, the production of free-range eggs is expected to grow at an annualised 15.1%, compared with just 1.9% annualised growth in cage eggs. However, the push towards free-range comes at significant cost. All along the supply chain, operators need to make the choice between capitalising on the higher margins of free-range eggs or taking advantage of the lower input costs of cage eggs.

While there is not yet any binding national criteria for free-range egg classification, the state governments have recently agreed to discuss a national standard, and the Federal Court ruled this year that free-range chickens must have access to outdoor areas every day. These moves are expected to increase consumers’ confidence in free-range purchases, leading to further demand.

Category Eggs (millions)
Egg distribution (2014-15)
Major supermarkets 1536
Specialty grocers 659
Food service industries 1019
Food manufacturers 829

Supermarkets pursue the golden egg

The major players in the supermarkets industry command an ever-increasing market share of egg sales, in terms of both volume and revenue, allowing them to drive the free-range trend.

“Supermarkets have been quick to take advantage of the higher margins attached to free-range eggs and are keenly advertising the responsible sourcing of their products to justify the price hike,” said IBISWorld Industry Analyst Stephen Gargano.

Cafes find the sunny side

It is expected that food-service operators will follow supermarkets in heavily advertising their use of free-range eggs, in order to attract customers and justify the increased cost of a Sunday brunch. Major players are leading the charge in this segment too, with McDonald’s committing to stop sourcing cage eggs by 2017.

Food manufacturers egged on

Food manufacturers will use an estimated 829 million eggs in 2014-15. As eggs used as manufacturing inputs are not visible, manufacturers have been subject to relatively less consumer pressure to source free-range inputs.

As local production shifts towards higher value free-range eggs, some food manufacturers may attempt to reduce input costs by sourcing processed eggs from overseas. However, manufacturers are likely to feel increasing pressure from downstream players in the supply chain over the coming years.

“Woolworths has already committed to using cage-free eggs across its considerable private-label range, and their subsequent advertising of this change is likely to put the input issue on customers’ radars,” Gargano said.

Eggs uncaged

Operators in the egg farming industry, which is worth an estimated $659.6 million in 2014-15, face the highest stakes in making the shift to non-cage egg production. Over the past five years, virtually all growth in egg production has come from barn-laid, free-range and organic eggs. These products carry higher price tags, pushing revenue up at a faster rate than volumes. However, cage-egg farmers making the transition to free-range production encounter significant costs in land and equipment.

The IBISWorld report forecasts that while farmers will be able to recoup some of their costs through the higher prices paid for non-cage eggs, some smaller players may be better off leaving the industry than making the transition, because farmers that resist the free-range trend run the risk of being caught in an oversupply of cage eggs.

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