The collapse of the egg supply chain last year was a reminder to retailers and producers that we need to work together to build collaborative relationships, says Farmlay Eggs chairman Robert Chapman.
In February I gave a speech to the NFUS about my experiences with the retailers. Some people may have expected that I would stand there and slate off the retailers as being a bad bunch, but that was not my intention.
I believe, strongly, that we all need to work together to achieve a profitable return to all sectors within the retail chain.
I got my first retail contract in 2007 when we secured Morrisons business for 50- odd Scottish stores. It took me many years to achieve and looking back, I certainly regard it as one of my main business achievements.
Before 2007 we supplied local stores, hotels, wholesalers and food service accounts but these sectors were in decline and in early 2000 we took the decision as a business that we would actively seek to secure a major retailer account.
After we had made this decision, we had to upgrade our premises, attain all the certifications, BRC, Lion, RSPCA Assured etc. and to also grow the business through securing short term food service contracts, so we had the volumes in place, for when we were successful in obtaining a major retail account.
52 weeks a year
One of the most important things the retailers demand is that you have the egg to be able to supply 52 weeks of the year.
This is a business decision that some of you might think was unwise, as the reputation of the retailers is one of screwing suppliers into the ground and giving us very little to live on. My business was founded in 1946 by my mother and father and my son Iain is now third generation.
When I left school, I had ambitions to have 100,000 hens and 1,000 acres of land. I can now proudly say that I have surpassed both of these targets by a considerable margin. This has been done mostly through my relationships with major supermarkets.
Even in the bad years, and there have certainly been a few of them, I never lost money, and in the good years, and there has certainly been a few of them, I have always invested back into my business, and I am now proud to say that we have 500,000 hens on our own farms, another 500,000 hens with contract producers packing five million eggs per week, 250 suckler beef cows and farm 2,500 acres.
Turnover this year will be around £40 million. So, is that not a good story to tell about the supermarkets? It is. But on the other hand, do I believe that the relationship between farming and retailers is equal, fair and amicable? I have to say probably not.
Retailers are hard-nosed business people, but I don’t think they are that different from farmers in general. When you go and buy a new piece of kit, you get as many quotes as you can, you use the lowest quote you have to drive the price of the one you really want down, and then you make the business decision as to which one you will buy. Is this really different from the supermarkets?
Power imbalance
The difference is there is definitely an imbalance between the power that supermarkets have over much smaller supplier businesses. They have been known in the past to actively encourage businesses to grow and then once you are dependent on them, the squeeze goes on, and you feel you have to match their lowest price to retain the business.
I believe farmers, and I certainly include myself in this, are sick to the back-teeth with red tape and over regulation. I am sure you are all aware of the debacle within Red Tractor at this time and we are currently faced, in the egg industry, with a very similar situation with RSPCA Assured.
They came out with a new set of standards and wished us to us to put verandas onto all our sheds and install windows so birds can have natural light during daylight hours. This would have cost the industry £10 per bird or £250m for the whole industry. There has naturally been a huge industry backlash against these proposals and the dubious welfare benefits. Like Red Tractor, RSPCA Assured has had to listen and they have reduced the requirements for verandas to be only an aspiration, but they are still insisting on windows. They have used scientific evidence based on studies done in Europe and the broiler industry.
There are huge differences between the weather in Europe and Scotland and even between Devon and Scotland. The difference in the length of day is considerable and in summer in Aberdeenshire we can have only four hours of darkness. This would cause huge management problems and increase the risk of feather pulling and pecking.
The UK lead the world in free range production, yet they think they should go to Europe to try and justify their demands. The birds already have access to natural daylight if they wish, as obviously when the pop holes are open, they can go outside and a large amount of natural light floods the shed anyway, so what is the need for windows?
It annoys me that the people who make these rules never look after a hen, work a cosy 40-hour week, never a weekend, and we, the farmers, are left to make these rules work in a commercial environment and also try to maintain a profitable business.
Cage-free commitment
The retailers have all committed to be cage free by 2025 which requires a huge investment by UK farmers to ensure that UK eggs are on the shelves of UK retailers. These standards make this far harder to achieve and the extra costs and management required means that foreign egg produced at a lower standard could be imported at a lower price.
In my experience many businesses are poor negotiators and what supermarket buyers do is they concentrate on the weakest members of the supply chain, drive them down to where they think the price should be and once they have secured that, this then becomes the base price. If you say this is unsustainable, they accuse you of being uncompetitive and ask you why you cannot be at this level along with your competitors. There is a great word in the English language: “NO”. We should use it more often.
One of the other important issues, I feel, is over supply. It is far easier to negotiate with a supermarket buyer if the market you are in is tight on supply. Oversupply is a supermarket buyers dream position as he knows there are suppliers within the chain who have product they must move and they will use this as a strong bargaining tool.
The traditional supermarket contract used to last for six or 12 months and basically once you had negotiated that, you nearly needed to start negotiating the next one. This is grossly inefficient as it sucks up so much management time that should be devoted to running the business.
Once you had negotiated the 12 month contract there was no movement in the price and if something happened that you could not have foreseen, you were stuck with the negotiated price. This model I believe, is totally unsustainable in the current market and I do believe that there is a change and a realisation within supermarkets that they need to start building longer term relationships with their supply base.
Unstable world
The world is becoming increasingly unstable and food security surely, must rise up everyone’s list of priorities. I have been asked before if I believe that politicians really understand the importance of food.
Unfortunately, on many occasions I think the answer to that question is only when there are empty shelves and a problem within the supply chain, then they realise there is nothing more important than ensuring that the public are fed.
So, what is the answer to retailers short term contracts, big boy bullying tactics and unreasonable requests? I think we in the egg industry have some of the answers and I would like to explain how we got there.
The egg industry has been driven by welfare considerations for many years, and the move from colony cages to free range has been led by welfare groups and retailers. The retailers have made a commitment to be cage free by 2025. This is a huge challenge for the egg industry.
A traditional colony shed can easily have up to 200,000 birds and is easier staffed and managed than a free-range unit. To rehouse these birds in a free-range system you need to build 7 x 32,000 units which all need 40 acres of land and at least one and a half members of staff to look after each unit.
The investment involved is also considerable with up to £1.75 million per 32,000 bird unit required. Three years ago, I told our customers that their commitment to be cage free by 2025 was not going to be achieved because they simply were not paying enough for their eggs and we could not get existing producers to expand and new entrants to come into the industry. I could see a shortage of eggs coming but I could also see a business opportunity.
In order to supply the shortage I could see coming, we started a major expansion of our own production. To cap this unfortunate situation we then had the outbreak of war in the Ukraine which caused a huge spike in cereals with wheat costs which peeked at over £330 per tonne.
This drove feed costs through the roof and energy costs, fuel, electricity and gas to rise substantially. Egg production was simply unsustainable and many producers decided they were going to de-populate sheds.
This caused a shortage of eggs, a large spike in the wholesale market and empty shelves in the shops. One of the advantages we have in the egg sector is the Lion standard. All retailers are committed to the Lion which means they must stock British eggs.
Spreading the risk
This is a huge help in stopping imported egg being sold by the retailers. The buyers came to us and asked what they had to do to correct the mistakes they had made in the past, so we told them they had to pay more money, offer a longer-term contract with a full cost tracker which maintains farmers margins.
We also told them they needed to take more of the risk as Avian Influenza was such a problem for producers that it was increasingly difficult to secure insurance and the risk for the farmer outweighed any potential returns.
So, did we get what we wanted? I think the answer is yes. We received a substantial increase in what we were getting for our egg. We now have a five-year rolling contract which if either party wishes to break, must give 18 months’ notice. We have a full cost tracker which covers everything, feed costs, energy, labour, pullet, grading, packing and distribution costs.
In order to be fair and transparent to both parties, the industry and retailers decided we would use ADAS as an independent body to track costs. ADAS produces a monthly cost of production and every quarter we will discuss with the retailer any change with the price, either up or down and the following three-month period will be based on these costs.
Any unexpected moves either way in costs can be dealt with if both parties agree they are exceptional. This will cover anything unexpected, like the Ukrainian war. I think this is a template that hopefully other sectors can use and gives the farmer security to invest and also gives retailers guaranteed supply at a fair price which gives everyone in the retail chain a profit.
Secure place
I believe the egg industry is in a very secure and sound place with the contracts we have achieved. We have a product the consumer wants to buy, is quick and easy to prepare, still a cheap source of protein, full of goodness and is one of nature’s super foods.
We are still looking for new producers to supply our demand for eggs and if you wish to diversify or have a son or daughter who wishes to come home, I would encourage you to look at egg production as a business opportunity.
Robert Chapman is Chairman and former Managing Director of Farmlay Eggs, the second largest egg packer in Scotland. This article is based on his speech at NFU Scotland’s National Conference on 8 February 2024.