Buying eggs—considerations and strategies

Buying eggs—considerations and strategies—


There are two buying strategies used to buy eggs:


1.      The traditional method contracts a set quantity of eggs for a set period of time (a month, a quarter, etc.) at a fixed price.  Most egg requirements are contracted this way.

2.      Grain Based—is considerably more complicated, but might make sense to a large industrial user under certain conditions.  I’ll explain grain based egg strategy in more detail below.

A grain based egg procurement strategy might be called for under the following conditions:

1.      Your egg requirement is significantly large.

2.      Your egg requirement is “in balance”—i.e. using a natural ratio of yolk to white.  For example, if you have a large yolk requirement, but not a large white requirement, you will force your vendor to find a “home” for the whites—probably through a deep discount for the whites—and the vendor will have to incorporate the resulting discount for the whites in your price for the yolks. 

3.      Grain based egg procurement takes the volatility out of the price of eggs.  This does not necessarily mean you will pay a lower price, but only that you will pay the same price over a long period of time.  This makes most sense when you are quoting business that demands flat/fixed pricing over a long period of time and where eggs are a significant raw material cost in the finished cost of your product.  In fact, over the life of the grain based agreement, studies show that the price paid tracks closely to the egg market and there is no price advantage to a grain based strategy.  The strategy is used to remove volatility—not lower costs.


Details of a grain based egg program

1.      The vendor of your eggs must either own outright or have access to a large number of flocks and be willing to commit the production of a fixed number of birds for the useful life of the flock (typically 3 years).  In other words, not all egg vendors are willing to sell on a grain based program.

2.      The grain based agreement is for the life of the flock (3 years).

3.      The commitment is for a fixed number of eggs drawn regularly over the life of the commitment—i.e. you cannot “skip” a month or two in your egg draws.

4.      The agreement fixes the vendor’s margin, packaging costs, processing and overhead, etc.  The only variables in the formula are the cost of the feed components (corn meal and soy bean meal).

5.      Working with the egg vendor’s feed supplier, the egg buyer agrees to a given cost for the feed components by agreeing to a contract price for corn meal and/or soy bean meal for a fixed quantity of meal for a fixed period of time.  (This is where a collar strategy might come into play as a method for moderating the risk of volatile feed markets).  Typically, meal costs are locked (with grain contracts) for a minimum of 3 months, and routinely run for a year or more. 


Once the feed components are locked, the formula calculates the cost of your egg product cost, and that cost remains “fixed” for the duration of the feed contracts (unless the agreement allows for extraneous items such as “fuel subsidy” adjustments).


By paying careful attention to grain markets (or relying on grain market experts like Moving Parts or JFS Strategic Consulting), the egg buyer should be able to lock feed costs at seasonal low points and take advantage of market moves that lock the ultimate egg price at the low end of the spectrum.  But as stated above, the key feature of the grain based strategy is have a known, locked price for a commodity that, traditionally, have been very volatile.