Eggs shortages: can dairy-style contracts mend the broken system?

Financially crippled egg producers have been warning since the spring that soaring costs, exacerbated by the impact of the war in Ukraine, could lead to egg shortages.

Speaking after eight of the UK’s largest supermarkets snubbed an industry summit on the matter back in May, British Free Range Egg Producers Association CEO Robert Gooch said the mults would have to pay more for their eggs – and ensure cash was passed down to producers – if they were to prevent empty egg shelves before the end of the year.

His warnings followed a poll of BFREPA members in April that revealed 70% of free-range producers planned to leave the sector within 12 months unless the parlous financial state many were faced with was resolved.

The threat of empty shelves became reality in November, as supermarkets were hit by shortages after hard-up producers either reined back or halted production. The country’s flock size had by then fallen year on year from 44 million to about 36.7 million birds, BFREPA data showed.

Supermarkets have since announced variously-described investments, support packages and “aid” for their egg supply chains, while introducing rationing and, in Sainsbury’s case, resorting to imports. But the cash injections have come “too late” to address the structural issues facing the sector in the short term, argues BFREPA’s Gooch.

He is calling instead for far-reaching contract reform, backed by government, in a similar vein to legislation planned for the dairy sector.

So, what exactly is the egg sector asking for, how might reform work, and could it fix the egg sector crisis?

Before the flurry of additional support for producers, the category had already seen average retail inflation of about 50p per dozen eggs this year, but with Bfrepa asking for an increase in farmgate prices of 40p per dozen, even now only about half of that figure has made it back to producers, according to BFREPA research.

That’s thanks to an opaque supply chain in which producers are often tied to long-term contracts to packers, leading to an invidious situation in which some farmers are making big losses on every shipment.

Mid-Wales-based producer Ioan Humphreys, who has been campaigning for a fairer deal on platforms such as TikTok as that_welsh_farmer, recently told The Grocer it was costing him £1.25 to produce a dozen eggs, but he was only receiving £1.07 in return, and many more producers across the country are in a similar situation.

It is unsustainable losses such as these that BFREPA hopes can be avoided through government intervention to ensure greater transparency around pricing between retailers, the sector’s more than 40 packing and processing businesses, and producers.

“We need transparent, sustainable contracts which producers are confident in,” Gooch says. “Our wish is that egg supply agreements between the farmer and packer are aligned with retailer and packer contracts.”

That would involve a statutory contract framework giving producers more rights to walk away from buyers, and greater transparency on the price paid by the retailer and the amount ultimately received by the producer.

It is something dairy farmers and the NFU have long been campaigning for – and legislation to make it happen will finally be presented to MPs in the new year, says NFU dairy board chair Michael Oakes.

Transparent, fair, visible

The proposed regulations, made possible under a “fair dealing with agricultural producers” provision in the Agriculture Bill, “will create transparency, fairness and visibility” in contract negotiations between milk producers, processors and buyers, Oakes says.

A tiered process of policing the rules will also give producers recourse to an adjudicator body “who you can go to if you have a grievance with a milk buyer who may not be following the legislation”, he adds, creating “much clearer pricing mechanisms”.

And other sectors, including eggs, “are seeing this as a potential way forward” Oakes points out, adding replicating the legislation could be “quite achievable” under the terms of the Agriculture Bill.

With that in mind, BFREPA has created an extensive ‘wish list’ for contract reform, including giving producers the option of moving to a new packer if their existing one loses a contract, so they do not end up “locked into long-term contracts with a packer who has lost retailer business and is forced to reduce their farmgate price”.

Much-vaunted feed tracker contracts between retailers and packers, (which move based on the price of feed costs) such as the one Tesco operates, must also be replicated and rolled into packer/farmer contracts, says Gooch, who has preiously noted how these types of arrangements also fail to take into consideration increases in the price of other inputs such as energy – which have also crippled the sector over the past 12 months.

Packer and farmer contracts should also not allow price reductions during the period of the agreement, without an option to break the contract via a shorter notice period than the one year-plus standard for a hen flock’s lifespan, he urges.

And among several additional proposed criteria, farmers should be allowed to cease production if making losses, while contracts should link egg prices to the cost of production (including fuel), introduce one “all egg” price, to increase transparency (current contracts quote different prices for different egg sizes), and have a mid-term review clause, Gooch suggests, to provide more stability.

Last week Defra hosted a roundtable with retailers, packers and producers to discuss the causes of eggs shortages and the profitability challenges facing producers. Government officials were “interested in where risk and profit lies in the supply chain and where it could improve”, Gooch says.

“All parties” at the summit agreed risk and profit should be fairly spread across the supply chain, he adds. It’s a point echoed by the British Egg Industry Council – counting processors and packers among its members – which this week told The Grocer “each part [of the egg sector] needs to be profitable to enable future investment”.

In a bid to prevent a repeat of the current egg shortages, BFREPA has now asked Defra to undertake a supply chain fairness review – similar to one it conducted of the pig sector earlier this year and the dairy sector during the summer of 2020 (which led to the dairy contract legislation due early next year).

Gooch and the BFREPA membership’s hope is that Defra will agree to a review that could ultimately lead to similar reform across the egg sector.

And it seems there is agreement that reform of some kind is needed, if the shortages of recent weeks are not to become long-term. But that will take time. And for now, eggs shortages will likely continue for some time yet.