Cal-Maine Foods – Egg Demand Outlook – 13 May 2021
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Specialist:
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Tim Dawson (TD)
Former CFO at Cal-Maine Foods Inc
Agenda:
1. Cal-Maine Foods (NASDAQ: CALM) – strategic update across egg value chain
2. Domestic egg consumption
3. Rise of cage-free facilities – capacity and margin implications
4. Foodservice recovery
Contents
Q: Could you give us an overview of the egg production industry? What are some of the main drivers? You
mentioned Cal-Maine is the top player in the world, but who are some growing competitors?
Q: Since Cal-Maine is the largest producer in the world, do you think that scale is more of a disadvantage
when it comes to potential legislation that would mean all its facilities would need to be cage-free?
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Q: You mentioned the retail grocery being one of the largest outlets for distribution. When 90% of Cal-
Maine’s sales are going to retail, would you say it is over-exposed to retail? Why isn’t there more distribution
toward food service? Is the demand not there, or is it more Cal-Maine not taking advantage and putting all of
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its eggs in one basket?
Q: Do you agree with the business model of focusing on the retail side and less so on the egg product side?
Could the drop-off in food service and egg product demand in 2020 have been an opportunity for Cal-Maine,
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with its balance sheet and expertise, to enter the market at a low or a very big discount?
Q: Can you discuss any inflationary pressures that experienced as CFO at Cal-Maine? What do you think the
company may be experiencing at the moment?
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Q: Is there any innovation along the lines of creating new ways to subsidise the diets or the feed cost?
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Q: How much flexibility do egg producers have to tweak the formula, given its direct impact on the end user,
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which is a human being?
Q: How much flexibility do you think a company such as Cal-Maine, given its scale, has to pass on some of
these inflation costs to the end user, whether that’s Walmart or others?
Q: Is the hens’ diet or feed corn or soybean, or does it have to be both? Is there any flexibility?
Q: What are your thoughts on Cal-Maine’s acquisition and integration of assets over the years? It is no
stranger to going out and buying assets, proven by the deal it just announced yesterday. Were there any
missed opportunities or was it too aggressive?
Q: Although Cal-Maine is the largest producer in the world, it seems the market is still highly fragmented.
Could you speak to some of the reasons for that fragmentation in the industry?
Q: Is there an advantage for Cal-Maine globally? People may want a company or a producer such as Cal-
Maine because it probably operates under higher safety standards.
Q: What does the trend towards health and wellness and the younger consumer being much more health-
conscious mean for Cal-Maine and its strategy?
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Q: How is Cal-Maine navigating what it means to be organic, and not have some of those additives into your
diet of chicken?
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Q: What do you think is the range of the organic egg market as a percentage?
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Q: How big of a risk do you think labour is at this stage or to the industry? Are a lot of things controllable by
automation?
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Q: Is the shift towards branded eggs necessarily leading to better pricing?
Q: Is there anything you think the investor community should know regarding Cal-Maine’s management
team or ability to execute on priorities? Is there anything that’s commonly overlooked in the industry?
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Cal-Maine Foods – Egg Demand Outlook
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview on Cal-Maine Foods - Egg Demand Outlook. I am Nyree
Hinton and I’ll be facilitating today’s Interview with Mr Tim Dawson, former CFO at Cal-Maine Foods Inc.
Tim, before we get started with today’s Interview, please state I agree or I disagree to the following statement:
You understand the definition of material non-public information and agree not to disclose any such
information, or any other information which is confidential, during this Interview.
TD: I agree.
NH: Thanks, Tim. Could you start by giving the audience an overview of your background and the various
roles that you’ve held in the industry?
TD: I retired from Cal-Maine a couple of years ago, but my background has been in the agriculture industry
throughout my career. I started in the agricultural business in the mid-1970s. I worked in the grain business
for several years. I worked for a company called Cook Industries at the time, which was the third-largest grain
company in the world, and after that, I spent over 20 years with Mississippi Chemical Corporation, which was
a chemical fertiliser producer, so we produced fertilisers for primarily domestic markets. Then, I went to work
for Cal-Maine. At Cal-Maine, I was a Chief Financial Officer. I was also a member of the Executive Committee
and on the Board at Cal-Maine Foods for about 13 years, in the egg business, and Cal-Maine, of course, is the
largest egg producer in the world. We can talk about that some a little more as we go through, but that’s more
my background. I’ve been in agriculture all of my career.
[00:01:44]
Q: Could you give us an overview of the egg production industry? What are some of the main drivers? You
mentioned Cal-Maine is the top player in the world, but who are some growing competitors?
TD: The egg industry, it’s an interesting business. As I said, I went to work for Cal-Maine in 2005. I’d been in
agriculture, but for me was the egg industry, and the egg industry still, today, is largely composed of family
businesses. I mentioned that Cal-Maine is the largest not only in the US but in the world, but most of the
companies in the industry are family businesses. Many times, they were businesses that started with, maybe,
great-grandmother having a few chickens in the backyard. They sold the eggs at the local store and then
continued to grow from that and grow from that, until now, I’m looking down a list at the top US producers.
Some of them may have 15-20 million laying hens now, but a lot of times, they started from a very small family
business, and most of these businesses continue to be family-owned.
Cal-Maine is a public company, really the only significant public company in the space. More recently, Vital
Farms went public this past year in the pasture-raised segment, which is a very small piece of the business,
and they’re a fairly small competitor but in a growing portion of the business. Those are the only two really
public companies in the space. If you look at it, the next-largest US producer is Rose Acre Farms, which is a
family business. It’s owned by the Rust family out of Indiana, and then Versova Holdings is number two. Cal-
Maine Foods is about 60% larger than Rose Acre Farms, and then the number-three producer is less than half
the size of Cal-Maine, so Cal-Maine is, and has been for several decades, a very significant force in the egg
production industry. The egg industry has been primarily, through its history until really the last 2-3 decades,
just a private label business. Each of these producers produced eggs for primarily the egg retailers, the grocery
stores. There were a few store chains, smaller. Of course, that industry has gone through a lot of consolidation,
Private and confidential 3
but they produced those eggs for those retailers under that retailer’s private label.
In the past, even some of those large grocery retailers produced their own eggs, but that’s not really the case
today. It was a private label business until the last couple of decades, when really, brands started to be
developed, and the largest single brand today is Eggland’s Best. Eggland’s Best is actually run as a co-
operative. Cal-Maine Foods is the largest member of Eggland’s Best, but not the only producer in Eggland’s
Best. There are over 10 producers in Eggland’s Best that produce Eggland’s Best according to the Eggland’s
Best specifications, and the idea with that, the concept at the beginning, was to provide national distribution
for a branded egg. That’s been very successful. That’s one of the changes that has occurred more recently. I say
recently. It’s really been about 30 years, I think, or so that Eggland’s Best has existed, and it is the number one
brand. If you looked at market share today, Eggland’s Best has the number one market share of branded eggs.
They are still largely, though, a private label business.
Cal-Maine Foods, their largest customers that they list in their filings are, number one is Walmart. Walmart is
the largest egg retailer in the nation because it’s the largest grocery seller in the nation. Also, some of the other
significant ones Cal-Maine would list in their number two and three customers, and I don’t know exactly the
order of those now, would be Publix Supermarkets and H-E-B. Publix is a significant grocery retailer on the
East Coast, and H-E-B in Texas. Those large grocery retailers are still the primary retailers of eggs. There has
been a trend in the last 15-20 years now. You have more eggs sold in quick service stores and drug stores and
things like that, and that’s been growing, but still, the bulk of the eggs are sold by those grocery retailers.
I mentioned Rose Acre Farms as the number two producer in the US. Versova Holdings is number three, and
they’ve got about 20 million hens compared to Cal-Maine’s 44 million hens. This is according to Egg Industry
Magazine. The producers report to Egg Industry Magazine the number of hens that they have. Versova
Holdings is a group of families in the Midwest, primarily in Iowa. They’re multiple families that own multiple
egg production facilities in the Midwest. Then, going down the list, I forget the figures now but the top 10
producers own a fairly significant portion of the egg production in the US. One of the questions you had was,
what are two or three trends you were noticing pre-COVID within the industry? Some of the biggest trends
that had been occurring over the last few years, I’ve mentioned the growth in branding.
One of the big issues has been for the last, say, 20 years or so is the influence of the animal rights groups on
the egg industry. Of course, some of the groups are just opposed. They’re vegetarian-focused or vegan-focused,
and they’re opposed to the consumption of eggs, but in some cases, and the Humane Society of the United
States is one of the big proponents in this, it has been instrumental in trying to get legislation passed
throughout the country that would require all eggs to be produced in cage-free facilities. If you looked at the
history of the egg industry, early on, all the eggs were produced in cage-free facilities. Some time ago, I don’t
know, 40 years ago or so, they began to be put into cages because a producer could better control the
environment of the hen, better control the feed, better control disease, all sorts of things. When hens were put
into the cages, really, when it started, it was a premium product, but now, because of the influence of the
animal rights groups, there has been legislation in several states that requires eggs to be produced in cage-free
facilities.
Also, those animal rights groups put lots of pressure on the various users and sellers of eggs. Many of them,
quite a number, have made commitments to go to only selling cage-free products by some period in the future.
The most common date for that commitment is 2025, so about four years from now, and these commitments
were made two or three years ago. There have been commitments made for up to 70% of the production. If all
of the people who said, “We’re only going to sell cage-free eggs,” did that in 2025, it would require that 70% of
the production in the US be in cage-free facilities. If you look today, about 26% is, so that’s going to require a
fairly significant capital investment, to convert the facilities that exist today into those cage-free facilities.
I think we’ll see how that works out in time, because unless something happens to provide better capital
growth in the egg industry, a lot of those smaller producers I’m not sure will have the capital available to make
the capital investment to convert to cage-free. It’s one of those trends you’ll just have to watch over time to see
what happens, whether the retailers will back off those commitments and only sell cage-free. This is always
sold that the consumer wants the cage-free product. The cage-free product has been available for many years.
If the consumer wanted the cage-free product, they could pick it up off the shelf, so it’s not really being driven
by the consumer as much as it is by the animal rights groups, because the cage-free product is more expensive
Private and confidential 4
to produce. When given the choice, obviously, many consumers still prefer to choose the least expensive
product, so that’s a trend where we’ll see how that develops over time.
Cal-Maine specifically, you can look at their filings, has spent lots and lots of money in converting to cage-free
facilities. They made an announcement yesterday where they were actually in a joint venture with Rose Acre
Farms in Texas, producing cage-free eggs, and Cal-Maine announced yesterday they were acquiring the other
half as a joint venture. They each had half, Rose Acre Farms and Cal-Maine, and Cal-Maine is acquiring the
other half of that facility in Texas, which is a large cage-free facility. Cal-Maine has been putting a lot of money
into converting to cage-free production, and of course, Cal-Maine is better equipped with the capital to do
that. They’ve put in a lot of money to do that, but there’s still an awful lot that will need to be spent by the
industry if you’re going to meet those goals of having 70% of production in cage-free facilities by 2025.
[00:12:19]
Q: Since Cal-Maine is the largest producer in the world, do you think that scale is more of a disadvantage
when it comes to potential legislation that would mean all its facilities would need to be cage-free?
TD: Everybody’s facilities were all caged except for very small producers. That’s one of the things that’s the
Vital Farms model, is they actually go to very small family producers that have very small farms and they
contract with them to buy their production, and some of that production is cage-free. Cal-Maine does some of
that, as well, in purchasing from independent contract producers, but that’s a much less efficient way to
produce eggs. Most eggs today are produced in what are called in-line production facilities, where the egg is
produced, it actually goes onto a conveyor belt without ever having been touched by human hands, and goes
into the processing plant and winds up in the carton that you buy in the grocery store without ever having
been touched by a human being.
When you get to the much smaller producers, where they’re not there at the actual processing plant, then the
eggs have to be farm-packed on the farm, handled again, moved to the processing plant, run through the
processing plant and then put in the carton that’s going to go to the store. It’s a much less efficient process, so
most production has been in-line production. Many of the conversions that Cal-Maine makes, and it will be for
many of the producers, all of the significant-sized producers, they won’t necessarily have to redo all of the
production. They’ll just have to change the housing systems within those houses and then, sometimes, build
new layer houses. In most cases, build new layer houses. They’ll still be connected by conveyor to the existing
processing plants, they’ll have access to their existing feed meals, so all of the infrastructure is there. It’s just a
question of putting the hens in a cage-free-type housing system.
[00:14:38]
Q: You mentioned the retail grocery being one of the largest outlets for distribution. When 90% of Cal-Maine’s
sales are going to retail, would you say it is over-exposed to retail? Why isn’t there more distribution toward
food service? Is the demand not there, or is it more Cal-Maine not taking advantage and putting all of its eggs
in one basket?
TD: I don’t think it’s not taking advantage so much as they believe that’s a better business to be in, and that’s
why they’re in that business. I started a minute ago. I probably should go back and talk about it, because we
haven’t. If we look at the eggs produced in the US, historically, a little less than a third of them are not sold in
the shell but are sold as egg products. When you start talking about food service, the largest use of eggs in food
service is in egg products, not in eggs in the shell. What happened last year in COVID, egg demand at retail
stayed very strong. People were eating at home and going to the grocery store and buying eggs. The piece of
the business that was hurt the worst was the food service business, but food service is not only eggs in the shell
but egg products.
As I said, traditionally, the number of eggs produced in the US, about 31%, 31.5%, 32% are broken and sold as
Private and confidential 5
egg products, either liquid, dried or frozen products. Last year that percentage was down somewhere like 26-
27%. What happened was the egg service business was down, retail business was up, and so the number of
eggs that were produced to produce egg products that were sold as egg products and not as eggs in the shell,
that went down significantly. If you looked at the number of hens in the country last year, when you started
the year in 2020, the number of hens went down during the late year. That was largely because of a reduction
of eggs to produce egg products, and you could tell that by primarily looking at where eggs, the hens
disappear. Iowa is the number one egg production state and, before 2015, had 20% of the hens in the US. If
you looked at the number of hens in Iowa at the beginning of last year and the end of last year, it was down,
just because a lot of the eggs in Iowa are produced for egg products. A lot of those hens that were used to
produce egg products were reduced, the number of those hens was reduced last year, and so we’ll have to see
how that comes back.
When you talk about food service, Cal-Maine has made the choice that their primary business is for the retail
consumer. They just believe that’s a market they’re more familiar with, and they believe that’s a better market.
Cal-Maine does also produce egg products. Egg products are a by-product, to one extent, of egg production.
Not all eggs are grade A eggs that can go into the carton. Many of them are off-size or lower-grade, and a lot of
those eggs do go into egg products. Cal-Maine Foods does own two egg product facilities, Texas Egg Products
in Texas and American Egg Products in Georgia, where they actually take their off-grade eggs and they use
that to produce egg products. You can see, if you look at the Cal-Maine filings, what percent. 3% of their
revenues or so, it may be a little different now, is from egg products, where they’re producing egg products in
their facility just to provide a market for their off-grade eggs.
35 years ago, just about all the eggs that were produced as egg products were those off-grade eggs, but as eggs
used in food service have grown, now there are a lot more facilities that were produced specifically in-line to
produce egg products. That’s where a lot of the adjustment in hen numbers last year occurred, in that egg
products portion of the business for food service. If you talk about eggs, a lot of the even quick-serve eggs that
you see, they don’t actually crack the eggs. That’s a liquid product. If you get scrambled eggs at McDonald’s,
they’re not in the back cracking those eggs. That’s a liquid product that they use. I think they do crack an egg
for the Egg McMuffin, and that’s one of their selling points, but if you’re getting scrambled egg, that’s a liquid
product, and that has some advantages from a food safety standpoint, because that product can be
pasteurised.
[00:19:38]
Q: Do you agree with the business model of focusing on the retail side and less so on the egg product side?
Could the drop-off in food service and egg product demand in 2020 have been an opportunity for Cal-Maine,
with its balance sheet and expertise, to enter the market at a low or a very big discount?
TD: I think I still would agree with the model that they’re using. If you looked over time, and I don’t have any
way of knowing how much exactly, but a lot of those egg products in the past have been produced on a cost-
plus model. Based on their cost through their facility, they would sell that to those egg products customers just
on that cost-plus basis, and I think Cal-Maine does not really want that much plain cost-plus-basis business,
because I think they feel they do better over time being on market-based pricing. It happens more in the retail
space than it does particularly in the egg product space, and I would agree with that. I think that’s better.
Particularly as a public company, I don’t think they want to be clipping dividends from just a cost-plus
business in egg products. I think they want to be trying to do the best that they can, and taking advantage of
markets where they can.
[00:21:11]
Q: Can you discuss any inflationary pressures that experienced as CFO at Cal-Maine? What do you think the
company may be experiencing at the moment?
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TD: Obviously, if you look at egg production, and Cal Maine breaks this down in their filings and you can see
it, there are different pieces of producing eggs, and the biggest piece of the cost of producing an egg is to just
get that egg at the processing plant at the farm. It’s the housing cost of the hen, the feed for the hen and the
hen itself, and all the cost to actually produce the egg. On top of that cost, you do have the cost of processing
the egg, which is where you have to wash it, put it in a carton and sort it, and then you have to distribute the
egg, and those are fairly significant costs, but the biggest cost is the actual egg production cost. If you look at
the egg production cost, just the cost to get that egg prepared there, between 50-65% of that cost is feed cost,
so the overwhelming factor for egg production cost is the cost of feed.
In today’s world, that cost of feed has gone up dramatically, and I think Cal-Maine somewhere even publishes
that, for every USD 0.25 into the cost of a bushel of corn, it impacts their feed cost a penny a dozen. By the
same token, USD 25 in soybean meal cost per tonne, it affects their feed cost about a penny per dozen. Feed
cost is the overwhelming factor, and certainly in today’s world, as well, because of what’s happened with corn.
Corn is over USD 7 a bushel now. Soybean meal is USD 400 a tonne. These are historically pretty high figures
for those two commodities, which are the two primary commodities, so that will impact Cal-Maine’s feed cost
fairly significantly, but it won’t just be Cal-Maine’s. It’ll affect everybody. Cal-Maine works, and all producers
do, Cal-Maine, I think, has a better system for it, on minimising the amount of feed that each hen consumes to
produce an egg. That’s the lever that you have, using the least feed to produce an egg, because everybody’s feed
cost is going to go up. Nobody is going to have some significant advantage on feed cost, because that’s one of
those inputs that’s necessary that nobody can avoid.
There is a very minimal amount of flexibility that can be gained from changing that feed formulation. There
are some other things. You can use corn by-product, the by-product of ethanol production that can be used as
a certain percentage of feed, depending on what the relationship between those costs is, but there’s not a
whole lot of flexibility in that. The best thing that you can do, the biggest thing that you can do, is be the most
efficient in not wasting feed, and having the hens in the best production situation possible so that you
minimise their usage of feed, because everybody’s feed cost is going to go up. That is going up significantly
today. The export demand for those commodities from the US is one of the driving reasons.
[00:24:53]
Q: Is there any innovation along the lines of creating new ways to subsidise the diets or the feed cost?
TD: There have always been a lot of things that have been done, and different people have had different
theories about even doing things like reducing the amount of feed you try to get, but there are always trade-
offs there. I think Cal-Maine has always taken the position that, “We’re going to use as little feed as we have to,
because we’re going to use it efficiently and not waste it, and not spill it and all those kinds of things, but we
still need to get the best production out of the hen that we can. We’re going to use a feed formulation that is
the best, that makes the most efficient production out of that hen,” and that changes. The type of hen, the age
of the hen, all sorts of things may affect that, but what you want to do is to have the most efficient feed
formulation that provides you the most eggs at the least cost. Like I said, there have been lots of things, and
there are always different producers. I’m some time away from this. There are always different people that are
coming up with, you used to call it foo-foo dust or something, different additives or things to enhance feed
consumption or whatever. Some of those may have a limited effect, and Cal-Maine, like all people, would be
looking at different pieces of that and maybe experimenting with that, but the biggest factor is really trying to
be most efficient with feed.
[00:26:39]
Q: How much flexibility do egg producers have to tweak the formula, given its direct impact on the end user,
which is a human being?
Private and confidential 7
TD: It’s not a huge factor. Like I said, you could do things, but at some point in time, it starts costing you more
in your egg production and egg quality than you gain from saving in the feed cost. There’s a little bit, but it’s
just not that material.
[00:27:12]
Q: How much flexibility do you think a company such as Cal-Maine, given its scale, has to pass on some of
these inflation costs to the end user, whether that’s Walmart or others?
TD: That’s a question that’s been around. Certainly, from the day I got to Cal-Maine, that was a question, “Can
you pass on the feed cost?” The answer is, “No, not directly,” but for a long time, the guy before me at Cal-
Maine kept a chart of what feed cost was and what the company’s profitability was, and it went back 30-35
years. If you looked at that chart over that 30-35-year period, and that might well have changed now, actually,
Cal-Maine was typically more profitable during higher-feed-cost periods. The explanation for that was, when
feed costs where higher, it had an inhibiting effect on hen numbers, and therefore, the supply-demand balance
was better. Like I said, and it has grown over the last many years, there are more sales formulas now that
include feed cost as a portion of the price, but the primary driver still for egg price is a supply-demand balance.
Looking over time, as I said, and I haven’t seen that chart, I quit doing it the last few years, but when feed
prices were higher, actually, Cal-Maine was more profitable, because it tended to inhibit the supply of eggs.
When a farmer put down a flock of hens, if feed costs were higher, he knew his cost was going to be higher so
he may not have put down as many hens. It is an issue today because of those rising costs of those
commodities, but nobody is at a real advantage or disadvantage in there, unless somehow they did book ahead
far enough to book ahead those costs and lock in some lower prices. Those prices have been rising for some
period of time now, so I doubt there’s much advantage left for anybody in that today.
NH: How hard is it to really hedge some of these future prices? Given the nature of the industry, commodities
have always historically been volatile.
TD: The real answer is you can’t hedge. You can forward-fix the price, but that’s not a hedge necessarily,
because you can forward-fix a price, but if the price goes down, you lost, if it goes up, you gained. You can fix
the price, but to get a perfect hedge, what you have to do is you have to match your purchase and your sale
price. If you’re purchasing corn and selling eggs, you could hedge that corn price if you could fix your egg
price, but if your egg price continues to float, you really don’t have a hedge. What you have is you have a fixed
input cost, and if you have a fixed input cost and you can guess that right, then you’ve done well, but if you
guess wrong, you’ve hurt yourself. That’s one that can go both ways, because, as I said, you can’t truly hedge it.
To hedge it, you’d have to fix your egg price. If you’re working from a cost-plus contract, then you’ve got to
hedge without fixing your price, because if the cost went up, your sales price would go up. As I said, that’s not
uncommon in the egg products business. It comes and goes more in the retail side of the business.
[00:31:05]
Q: Is the hens’ diet or feed corn or soybean, or does it have to be both? Is there any flexibility?
TD: No, it has to be both. There’s a little bit of flexibility, and that flexibility again would depend on the age of
the hen and other things, but it’s going to be about 3-to-1 or so between corn and soybean meal. They’re
different commodities. The protein primarily comes from the soybean meal. The feed formulation has to have
the proper nutrition for the hen, so there’s a little bit of give in there, but the biggest thing is still getting the
best formulation that gets the hen to be the most productive.
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[00:31:56]
Q: What are your thoughts on Cal-Maine’s acquisition and integration of assets over the years? It is no
stranger to going out and buying assets, proven by the deal it just announced yesterday. Were there any
missed opportunities or was it too aggressive?
TD: That’s been their model for a long, long period of time. I mentioned that most of the companies in the egg
industry are family businesses. If you look over time, what Cal-Maine has always done is, when those families
get ready to make a change, Cal-Maine is there, and there is not a single producer in the business that doesn’t
know that. They know, if they want to sell their family business, that Cal-Maine is a possible acquirer for them,
and that’s what Cal-Maine has done. If you look at the acquisitions they’ve made over time, while I was at Cal-
Maine, we bought a business where there were three sons that were running the business after the parents
died. There can be issues there, and oftentimes, if there are issues about who’s going to run it or whatever, that
provides a good opportunity for Cal-Maine. Lots of times, these families, the parents or grandparents may
have built this. This may be a USD 150m business, and they’re just ready to cash out and go to Vegas.
Cal-Maine is always there as an acquirer for that business, and as I said, there’s nobody in the industry that
doesn’t know that Cal-Maine is a possibility for them. Has Cal-Maine been too aggressive? I don’t think so. If
you did every deal, you would be being too aggressive. They don’t get them all done, but they have done
enough in time that, to the extent that it’s happened in the business, they’ve been rolling up that business over
time, and now they do have 44 million hens, according to Egg Industry Magazine. It’s been a model that’s
worked for them. They try not to be too aggressive, but when Fred Adams was still alive, he never saw an
acquisition he didn’t like. He still didn’t get them all done, but the upfront capital cost in those volatile pricing
markets, if you guess right, I think Fred made one acquisition of the egg production assets of Cargill back in
the 1970s or so. Cargill first couldn’t decide whether to get out of the egg business or not, and then the price
was down, everybody was losing money, and Fred stepped out and made that acquisition and paid for it in 18
months, because the markets turned.
That capital cost, whether you’re paying too much or not paying too much, really just depends on what
happens in the market after you make that acquisition. If you make the acquisition when the market is down
and that lowers the price some, then that can be overcome very, very quickly. That pricing volatility just is
extreme in the egg business, and egg pricing is not only seasonal. It’s cyclical. It’s just extremely volatile. I was
in the chemical fertilizer business for a long time and chemical fertilizer was very volatile in price, so when I
went to the egg business, I said, “I’m used to this volatility in price.” Then, I was in the egg business for a short
period of time and the price changed 38% in eight days. That’s price volatility, but that’s something that has
existed throughout the industry in the egg industry. That’s why Cal-Maine, with their size and their efficient
production, they’re able to weather those cycles like that, and so they’re able to demand the long-term return
that the industry will provide despite that volatility in pricing.
That volatility in pricing, I mentioned that example but it can worse than that. The price can be extraordinarily
volatile, but it’s seasonal, as well. During the high-demand egg periods, which are coming into the spring,
approaching Easter, no longer because of Easter eggs as much as because of the heavy baking period at Easter,
and then the heavy baking periods around Thanksgiving and Christmas, egg demand is much stronger and egg
pricing is stronger. Egg pricing is weaker during the summertime, after Easter. From Easter to Labour Day,
egg pricing is typically fairly weak, and then, after Labour Day, when the kids start going back to school and so
you have a more organised family breakfast, egg demand picks up. It typically runs fairly strong through
Christmas, drops off a little bit and picks up at Easter, and then goes back into the summer doldrums. You do
have that seasonal element of egg demand, and typically, pricing follows that.
[00:37:30]
Q: Although Cal-Maine is the largest producer in the world, it seems the market is still highly fragmented.
Could you speak to some of the reasons for that fragmentation in the industry?
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TD: I think that’s what we really already talked about. That fragmentation exists because the industry grew
out of these family businesses, and a lot of those families, they’re still in business. I’m looking at the list now,
and there are some exemptions, but Herbruck’s, that’s the Herbrucks, and we know the Herbrucks. Weaver’s,
we know the Weavers. Sauder’s Eggs, that’s all Sauder. Hickman’s, that’s Greg Hickman. These are just family
businesses, and those businesses have been very good for those families and so they’ve stayed in that business,
but the turnover occurs when something happens within those families. Hickman, his son I don’t think wants
to be in the business, so when he goes, is that a business that will turn? Cal-Maine acquired the guys in
Wharton County, Texas, because Mr Vince Reina, his sons didn’t want to be in the egg business, and so when
Mr Reina got about 80, Cal-Maine was able to buy that business. It was a fairly significant acquisition, but the
children didn’t want to be in the business. Anyway, as these families continue to grow and you’re looking at the
time schedule of this, this was 50, 60 years ago when a lot of these started to be built, so some of them are
going into the third and fourth generation. Anytime there is a generational change, that provides an
opportunity for maybe that generation that doesn’t want to be in the business, but it is a lot of these family
businesses, and that’s why there is still that fragmentation.
[00:39:26]
Q: Is there an advantage for Cal-Maine globally? People may want a company or a producer such as Cal-Maine
because it probably operates under higher safety standards.
TD: Egg production internationally, typically, there are not huge markets for eggs in the world. Primarily
where people eat a lot of eggs, they produce a lot of eggs. If you look at it, the Chinese have huge numbers of
hens. The Chinese are huge egg consumers. The per-capita egg consumption varies fairly dramatically around
the world. The US is fairly high, but Mexico is much higher, China is much higher. Typically, where there’s a
high per-capita egg consumption, there’s fairly high egg production. There are not huge export markets for
eggs. There are some exceptions. The Dutch are fairly significant exporters. If you look at the US, exports are
actually up this year from prior years. Year-to-date, and I can’t remember the year-to-date of the last month,
about 3.8% of US production has gone into export markets, so it’s still fairly small, and for the US, it’s fairly
small compared to some of the other major agricultural products of the US. Chickens, broilers, a much higher
percentage goes into export markets, pork, beef, all those have larger percentages of that product that goes
into export markets. Another piece of it is eggs can be transported. It’s not as easy to transport eggs as some of
these other products, but exports are a much smaller piece of the business than it is of other major agricultural
commodities in the US.
[00:41:25]
Q: What does the trend towards health and wellness and the younger consumer being much more health-
conscious mean for Cal-Maine and its strategy?
TD: The start of the health and wellness thing has been a longer-term thing. There are multiple pieces of that.
It used to be just that eggs would kill you. If you walked near an egg, it would kill you because of the
cholesterol. That was just false, and that’s been proven false now. Now you don’t have the concern about
cholesterol in eggs, and so that takes away that stigma that eggs had largely during the 1980s and 1990s.
That’s pretty well gone altogether now, except some low vestiges of it somewhere. Eggs are a very natural
product. They’re one of the most inexpensive sources of protein. It’s a healthy product, so all the health and
wellness trends really speak very well for increased consumption of eggs. If you look at per-capita egg
consumption in the US, it’s been rising for the past several years. Not nearly to the levels it was. You looked at
the 1940s and 1950s in the US, per-capita egg consumption was over 400 per capita. It got down into the low
240s, 250s and now is up into the upper 270s, so it’s moved up fairly significantly in the last 15-20 years, but
still below the levels that it was 50-60 years ago. Some of that does have to do with because it is a natural
product, and like I said, lots of good benefits from eating eggs and that’s more recognised, along with the loss
of the stigma related to cholesterol.
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[00:43:21]
Q: How is Cal-Maine navigating what it means to be organic, and not have some of those additives into your
diet of chicken?
TD: That’s a whole broad category there. Cal-Maine does sell organic eggs and has been for some period of
time, and there is a market for organic eggs, but it’s a limited market. They’re much more expensive to
produce. Cal-Maine does, in multiple locations, produce organic eggs, and will continue to grow that
production to meet that market as it grows. It’s one of those things, and Cal-Maine’s always been very careful
that you don’t want to overproduce for that market because organic eggs are much more expensive to produce.
If you produce organic eggs and there’s not a market for organic eggs, that’s not very good. They’ve tried to
work, and everybody has to do that in the industry, to try to meet the market needs for those products, organic
is one of them, cage-free is the other, to have production meet the market demand for that but not overstep it
too much, because you don’t want to overproduce the more expensive product to produce. Some people are
interested in organic. It’s interesting. If you just go sometimes and just sit and watch the egg case in the
grocery store, 30 years ago, 35 years ago, the housewife, and 35 years ago, it would’ve been the housewife, goes
into the grocery store and she was two choices. She has medium or large eggs, and her mother told her, if large
is more than a dime more than medium, you buy the medium. That was the choice that she had.
If you look at the egg case today, there are 30 different SKUs. Now you go in, you go to the egg case and you
see the father with a child in the grocery basket, and he’s looking at those 30 SKUs and he doesn’t know what
to do. He doesn’t have much of a knowledge because there’s a lot of choice there in that case. Then, you will
see maybe the 50-year-old woman that thinks that that organic is that much better, and she will go straight to
that USD 5-6 dozen of eggs and pick up two of them without ever looking at anything. There are a lot of things
that have happened in the egg markets over the last 15 or 20 years. Some people are willing to pay that
premium. The organic has to be a premium. You have to use organic corn, you have to use organic meal. There
are lots of other conditions related to a lot of specifications related to organic, all that increase that cost. For
somebody who thinks that that’s what you have to do and they’re willing to pay that cost, they go do it. That’s
not the bulk of the market, though, because the bulk of the market is still the standard-produced eggs. I don’t
buy organic eggs. I don’t think it’s worth the extra cost, and I’m not sure some of those things are actually
better, anyway.
Cal-Maine will tell you, “We produce whatever the market wants,” so they do produce organic eggs. They
produce cage-free, they produce brown eggs, they produce white eggs. There have been other, I can’t even
remember what some of them are, high-nutrient-content specifications for eggs over time. Some of those have
gone away over time, but Cal-Maine has typically been willing to produce whatever the customer wants. The
more recent thing, though, is the pasture-raised, which is the Vital Farms model. I think the last thing I saw
was that Cal-Maine wasn’t yet in that market, but if that market grows enough, they will be. Pasture-raised are
clearly the most expensive to produce, but if you think that hen out in the pasture eating worms and bugs and
its own excrement is a better tasting egg, then if you want to pay that for it, go for it. It’s going to be more
expensive, but that’s why they’ve got chocolate and vanilla.
[00:47:45]
Q: What do you think is the range of the organic egg market as a percentage?
TD: I probably have a graph here somewhere. If you just look at the number of organic hens, I think the
USDA, and I did have that pulled up but I don’t know if I’ve got it on my computer now, they give you the
number of cage-free hens, and the number of cage-free hens is about 26% of the total hens in the US today. Of
that 26%, a subset of that is organic, because all organic does have to be cage-free. There’s a chart. Organic is,
if I’m reading this chart right, somewhere around 50 million out of the 325 million hens, so it’s whatever that
is. 12-13% of the hens are organic. You could find that exact figure somewhere, but it’s a subset of the 26% that
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are cage-free.
NH: How serious are these potential implications of the legislation for cage-free eggs?
TD: I think that will continue. I think as I mentioned, the Humane Society of the United States has lawyers in
every state in the union that are working towards trying to get that legislation passed. Obviously, there are
certain areas of the country where that’s easier to happen than others. For that type of legislation, the pass in
Mississippi or Texas or Louisiana is not that high, but in many states, it has already passed. I think it will
continue to be passed in additional states, with phase-in periods, and that’s why, eventually, I think most egg
production will be cage-free. As I said, if all the people that have said they’re only going to sell cage-free or use
cage-free stick to those promises, that would be about 70% of the production already. I think that’s why
particularly producers like Cal-Maine, Rose Acre, many of them are spending the capital money to convert to
cage-free, but it’s the same thing. You can’t get too far ahead of that market, and spend the money and incur
the additional cost, if the market is not yet there to consume that product.
Fairly early on, and I don’t know where it stands now, but a few years ago Costco was one of the first people to
just say, “We’re going to go ahead and make that commitment and go to cage-free,” and when they did, their
egg sales dropped 30-40% pretty quickly. I can’t remember now how much they stuck with it, but cage-free, it
just has to cost more. This is a pretty extreme timeline, but historically, cage-free eggs had been from brown
birds because brown birds just traditionally had a temperament that worked better for a cage-free facility.
Brown birds are bigger birds, so not only are they bigger birds, they consume more feed. Not only do you have
the additional occupancy costs from having more room for the cage-free birds, but you had more feed costs,
because it took more feed to produce an egg in a brown hen than it did a white hen, and the white hens were
typically used in the cage facilities. They’ve been working on the genetics for white hens, they’ve been going to
more production of cage-free eggs with white hens, so all of that’s changing and evolving over time, but those
are all just some of the small, complex pieces of how this works out over time. I think, obviously, cage-free will
continue to grow. They will continue to add cage-free hens. Where that caps out, I just don’t know, but like I
said, Cal-Maine has spent lots of money on adding cage-free facilities and continues to do so.
[00:51:54]
Q: How big of a risk do you think labour is at this stage or to the industry? Are a lot of things controllable by
automation?
TD: Getting good labour has always been a challenge in the industry. Because these farms exist in rural areas
where there aren’t large populations to draw from, getting adequate labour has always been a problem.
Obviously, feed costs way overwhelm the cost of labour in the production of eggs. The biggest labour
component in eggs is not in the production of eggs, but it’s in the processing and packaging of the eggs. There
is a lot of automation that can be available for the processing and packaging of eggs. I’m sure it’s getting better
all along. Until the last years, some of the issues involved with the automation really didn’t save you that
much, but if labour costs get high enough, you can save on labour costs in that, as I said, packaging and
processing cost, which is where your biggest labour costs are, anyway. That will vary by farm, and how much
money you want to spend in adding additional capital costs in an older farm vs a newer farm. A lot of the
newer farms that are built do have more automation in the processing facilities.
[00:53:27]
Q: Is the shift towards branded eggs necessarily leading to better pricing?
TD: Certainly, if you’re not getting a premium for your branded product, why do it? That’s why I mentioned
specifically Eggland’s Best. It’s been a branded product which has had a premium price. They’ve done real
good, I think, Eggland’s Best has, and Cal-Maine, as I said, is just a member of that group, Eggland’s Best.
Eggland’s Best has done a good job of protecting that brand. They do have standards for all of the producers
Private and confidential 12
that produce under that. They’ve done a fairly good job of promoting that brand. I haven’t seen any brand
figures for a while, but there was no other brand that was even close to that in the US, as far as market share of
Eggland’s Best, and as I said, part of that is they’ve done a good job of protecting that brand. There aren’t a
whole lot of other significant brands out there. There’s Pete and Gerry’s, there are some of these others, the
Vital Farms, but those are all fairly small as far as the overall size of the market. Cal-Maine has some brands
that they’ve used, but still, the private label brands are the biggest-volume product, and then you follow that
next with Eggland’s Best, which is a nutritionally enhanced product that is the biggest national brand by far.
[00:55:00]
Q: Is there anything you think the investor community should know regarding Cal-Maine’s management team
or ability to execute on priorities? Is there anything that’s commonly overlooked in the industry?
TD: I think one of the things is, and Cal-Maine’s always done it, and whether it’s had the impact or not, I think
they do have a good team there now, they’re following the model really still that Fred Adams put in place, and
I think they’ve been fairly disciplined with that model. It’s still largely a commodity business, and if you’re in a
commodity business, if you’re the largest and you’re the most efficient, then you’re successful. They’ve worked
real hard. They have a system that they use and they’re very open about that, where they set these key
performance indicators, and they do that for each farm in their system and each of their managers. A
significant portion of their compensation is based on how they deal with these key performance indicators,
and targets related to those key performance indicators in their production. Those things are some that I’ve
been talking about, like how much feed? What’s your feed efficiency? How many of your eggs do you get that
are grade A? How much are large and above?
All of these are things where there’s no just specific formula that gets you to those, but all of them force you to
do a real good job of trying to manage your facility efficiently, so that the hens are doing the best job that they
can, that they’re comfortable, they’re fed right, they’ve got the right light, you’re doing all the things. There are
thousands of factors involved in that, but by that constant attention to those key performance indicators, I
think that that does make them. If you have a Cal-Maine-run facility with that system, and you have an exactly
identical facility that’s just maybe run by a family, just the family watches over it, I think the Cal-Maine facility
is going to be more efficient every time. If Cal-Maine has an old, inefficient facility, they might not do as well,
but they’ll do better than somebody else running one of those old facilities because of that just constant
attention to those details that make you efficient.
[00:57:27]
NH: We will now end the Interview there. Let me close by saying thank you, Tim, for your input. Really good
Interview, and a good overview of the egg industry and some of the challenges there they’re going to face or are
facing right now. Clients, if you wish to speak with our specialist in a private call or meeting then please let
your relationship manager know. Also, thank you, clients, for joining Third Bridge Forum’s Interview today.
Goodbye.
TD: Thank you.
Transcription ends at 00:57:49 of recorded material.
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