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Converting to Cage-Free—A Financial and Timing Dilemma

02/26/2020

As we transition through 2020 we should remember that we are now at the mid-point of the ten-year grace period to achieve conversion from cage-free housing of hens to alternative systems, intended to be complete in 2025. As of January this year the USDA reported 70 million hens out of a nominal 330 million were housed in other than conventional cages representing 21 percent of the national flock in production on commercial farms. This means that in the next five years an additional 260 hen-places will be required for the shell egg and products segments. At a conservative cost of $40 per hen, representing an average between conversion of existing houses and erection of new complexes, the capital required to achieve re-housing will amount to $10.5 billion for hens plus a provision of about $2.5 billion for rearing pullets assuming no further expansion through 2025. 

 

How did we get to the present situation? The Humane Society of the United States (HSUS) under the direction of then president Wayne Pacelle adopted alternative housing for hens as a primary objective. Not because his organization cared for hens (or for that matter any animal), but the issue served as a rallying cry to attract funding for the HSUS. Income that was to be used for lobbying, advancing a vegan agenda and supporting a cadre of administrators feathering their collective nest. Animal shelters received less than one percent of revenue over successive years in the 2000s and since despite heartbreaking TV spots featuring neglected dogs and cats.

 

Pacelle advanced a two-pronged approach to pressuring producers to convert from cage housing. The first involved ballot initiatives in states that functioned with constitutions allowing legislation by citizen vote. Mounting a successful campaign in California, Proposition #2 passed with two thirds of ballots cast in 2008 paving the way for Oregon, Washington, Rhode Island and Michigan. More recent initiatives or legislation is under consideration for Arizona, Colorado and Hawaii. States with constitutions placing the legislative process in the hands of elected representatives and senators were refractory to HSUS tactics of voter manipulation using ballot initiatives.

 

Then came the second prong. The HSUS coerced a range of egg purchasers to commit to announcements of a ten-year period of transition to achieve complete conversion. Failure to make a declaration in 2015 through 2016 would have been to invite adverse publicity, condemnation on social media, store demonstrations and brand degradation. For an executive a commitment to convert was essentially a no-brainer given that most of the decision makers would have moved on or retired by 2025. The HSUS was initially helped with their campaign by a number of companies mostly with E.U. roots involved in food service, manufacturing and retail. Most of the members of the Food Marketing Institute, National Restaurant Association, National Council of Chain Restaurants and others were blindsided by the speed at which commitments were extracted and publicized.

 

The justifications regarding consumer demand for enhanced welfare in the form of cage-free housing was thin to non-existent. Superficial and unscientific surveys with biased questions and doubtful validity were commissioned by the HSUS and also by kindred animal rights and pro-vegan organizations. Sure the studies showed that affluent shoppers would prefer to have hens scratching in pasture or roaming in barns than confined to cages. The surveys were constructed to deliver a pre-determined result, rather like asking a six-year old if they are in favor of ice cream. A scientific study has yet to be published using conjoint analysis to determine willingness to buy eggs from hens housed under different systems but with unique and relevant prices. Everyone wants welfare but not everyone is willing or able to pay for it. Effectively we are witnessing an after-the-effect manifestation of consumer choice with multi-tier attributes and pricing. Generic eggs from hens in cages are marked at about $1 per dozen on the shelf compared to cage-free aviary and barn eggs at $2.50 per dozen. They have the same nutritional value, similar packaging but bear a price differential reflecting the additional cost of production and retail markup arising from the cage-free attribute.

 

Given the effective saturation of the shell-egg market characterized by small annual incremental increases in demand, despite promotion by the AEB, consumers have effectively defined the volume of cage-free product they will buy and at what price. To continue with conversion by committing loan capital in a market offering negative returns is fallacious. Dolph Baker Chairman and CEO of Cal Maine Foods has indicated that conversions by his Company going forward from 2020 would be “market driven”. Mainstream supermarkets now regret their haste in conceding to the HSUS and desperately want to retain the option to sell a range of eggs to consumers with the existing range under stable conditions of $1 per dozen for caged product up to $3.00 for eggs derived from hens under alternative systems.

 

Now is the time for members of the FMI, NCCR, NRA and others ensnared by the HSUS to collectively absolve themselves from commitments made in haste in 2015 and 2016. Decisions made under duress and without appropriate market research. Customers are now voting with their purses and wallets. The industry has reached a plateau in conversion and to continue to completion by 2025 would be detrimental to financial institutions, producers, retailers and consumers. Conversion can and should continue but at a pace consistent with replacement of obsolete high-rise houses fitted with cages and with an expectation of a reasonable rate of return on capital invested.