The Aldi chain of supermarkets in the U.K. has announced that all eggs sold in its stores will be from flocks housed as cage-free.  Although fourth in size among U.K. supermarket chains, Aldi is a leader in free-range eggs produced on domestic farms.

In recent years, major U.K. chains have ignored requests for higher transfer prices especially after the Brexit misadventure that resulted in a sharp escalation in the cost of feed, energy and other inputs.  Failure to rise above breakeven resulted in many producers ceasing production as they exhausted working capital. This in turn resulted in shortages and rationing by specific chains that were unable to recognize the consequences of their myopia.

Through financial turbulence, Aldi maintained a practical business relationship with suppliers, invested up to $60 million the form of subsidies and entered into long-term contracts that sustained their supply farms through financial challenges.

Julie Ashfield, Managing Director of Supply Chains at Aldi U.K. stated, “Our British suppliers are at the heart of our business and without them Aldi would not be where it is today, and we are proud to work with so many U.K. egg farmers.”  She added, “By working with our suppliers we have been able to hit our cage-free target more than a year early.”

It is hoped that Aldi in the U.S. will follow the lead of its sister company in the U.K. and their policy will be emulated by U.S. chains.  It is noted that conversion from conventional cage housing to alternatives including barns, aviaries and to a lesser extent, free-range, have been financed by individual producers including family farms and companies despite prices being limited by straightforward supply and demand constraints.  For decades the supermarket chains have benefited from investments made by egg producers who are ill-served by the prevailing benchmark pricing system that favors chain buyers in negotiating prices.  Failure to allow producers to recover their fixed costs including fair depreciation and interest limits ex-plant margins and inhibits the installation of improvements and upgrades.  The policy of minimizing prices is especially to the disadvantage of smaller operators who do not have the benefits of scale of production.

The ongoing avian influenza epornitic since 2022 with seasonal pauses in incidence rate has resulted in an average reduction in the size of the producing flock by approximately 20 million hens.  This has contributed to an escalation in price attributed to disequilibrium between supply and demand and has in some measure reduced the bargaining power of chains.  With restoration of flock size given the maturation of 20 million pullets per month, prices will inevitably fall especially if additional losses do not occur in fall and early winter as in previous years.  As transfer prices decline, it is hoped that chains will reduce shelf prices proportionately to sustain demand.  Maintaining high retail prices with declining wholesale values is detrimental to both consumers and the production sector and represents a form of price gouging. 

There is concern that in public statements, Doug McMillion president and CEO of Walmart Inc. has indicated that producers and food manufacturers can expect price pressure from Walmart, the nation’s largest food retailer.  Although the initiative for lower prices by Walmart is directed in the first instance towards processed and dried food it is inevitable that produce and eggs will follow.  A spokesman for TD Cowen noted, “We expect pressure from Walmart for deeper price rollbacks to continue especially in categories where Walmart can flex its private label merchandising.” John David Rainey, CFO for Walmart stated, “We are advocating for our customers, we want to drive our everyday low prices and we are not intending to achieve any of our margin performance by passing this along to our customers and Sam’s Club members in the form of higher prices.” 

The implication is obvious, Walmart and by association all major chains want to keep prices low to maintain traffic but are obviously averse to smaller margins.  It does not take a CPA to determine who will bear the brunt of the initiative.  The situation will be exacerbated if the merger between Kroger and Albertsons were to become a reality since promises made to reduce prices in the short term would be coupled with intensified buying power affecting both national and regional producers.

Despite greater scrutiny of margins and profits generated by retailers, through their shelf prices, pressure on producers will continue for the foreseeable future. Appropriate approaches for the industry would be:-

• strive for greater efficiency,
• establish Capper-Volstead marketing cooperatives,
• promote a CME market for generic Midwest Large in place of the current benchmark    price discovery system that functions to the disadvantage of producers,
• diversify product range with more specialty eggs,
• develop new egg-based products for food service and QSR markets
• demonstrate restraint in expansion without participating in any form of collusion.

Enhancing returns to producers will require adoption of novel strategies to counter the power of the major chains.

18 weeks below breakeven in a down market