WattAgNet: Lenders will be cautious toward cage-free egg expansion

A leading creditor for the egg industry predicts $6 billion of investment must be in order for the industry to meet cage-free demand in the coming years. This will challenge lenders and borrowers.

Jeff Coit, vice president of agribusiness finance and poultry industry specialist at Omaha, Nebraska-based Farm Credit Services of America, spoke about financial challenges due to the expected rapid shift to cage-free from conventional egg operations in the U.S.

Coit told the audience at the Egg Industry Center’s Issues Forum in Chicago that, while there is some wiggle room, egg purchasers’ cage-free pledges generally mature in 2025. Between now and then, Coit said, the U.S.’s cage-free flock must grow to 145 million birds from its current size of about 13 million birds to meet the pledges.

The switch will cost producers about $40 to $50 per bird, or about $6 billion in total to house the needed birds. Coit said about 40 percent of that amount is “net capital need” -- what the industry will need to provide up front -- and the rest is “debt financing” -- what will need to be borrowed.

Coit said current market conditions will make lenders hesitant to dive in.

“We need to make sure that the industry is very liquid and well-capitalized going into this movement for cage free. Because we over-leveraged cage free and we experienced really erratic market conditions, like Germany experienced,” Coit said, “we’ve put ourselves in a very negative position.”

Factors lenders consider

The value of an operation’s existing assets; the type of housing; and the relationship between the farmer, the customer and the creditor will play a role in lending decisions surrounding cage-free.

Whether cage-free birds will be kept in a converted conventional house or in a new house built on greenfield, or previously undeveloped land, can affect costs, especially because getting a permit to expand an operation can be difficult. He recommended leveraging existing building permits and adding new cage-free birds through attrition.

The type of housing system used can also factor into overall costs of conversion. The necessity of specialized housing for pullets, which must be kept in cage-free pullet-rearing spaces before being placed in cage-free housing, should be considered as well.

Lenders also look for market commitments made between an egg producer and its customers. While long-term contracts are not necessary, Coit said, commitments and agreements showing a lender the farm will consistently have a market for its products are important to lenders. As always, the financial health of an operation is essential and lenders pay special attention to a farm’s profitability.

Finally, the value of collateral is essential. Most of Farm Credit of America’s farmers have multiple operations, or greater overall collateral support, due to years of expansion or consolidation. The big question in this space, Coit said, is the value of conventional operations going forward.

“What is going to be the level of collateral support going forward? As we move to cage free, what is the value of an old high-rise facility or a battery (house) over time? I’m not saying I see that eroding any time that quickly, but it is a dynamic,” Coit said. “It will impact the collateral support.”

Obstacles to lending

Coit said several factors outside a farmer's control can influence the availability of capital.

One of the most important factors is the lender’s appetite for risk. If lenders feel that times are too hard and making a loan is too risky, they will withhold capital. Coit said his organization is focused on agriculture and will continue to be active, but other lenders may withdraw or stay on the sidelines if they feel the market is not strong enough.

He said the current strength of the market is helpful and if the U.S. can prove itself free of highly pathogenic avian influenza, more lenders will likely get involved in the egg industry. While the industry is still recovering from the 2014-15 outbreak, it is financially healthy and nationwide egg consumption continues to grow as consumers choose eggs for more than just breakfast.

Another factor to keep in mind is the availability of construction materials and contractors capable of building housing. Coit wondered if the construction industry will be able to keep pace as many U.S. egg producers hustle to build or convert housing to meet cage-free commitments.

The final question for lenders and borrowers is whether consumers, rather than the companies who’ve made commitments, will choose to purchase cage-free eggs.

“We know today that markets provide consumers with the ability to choose between the higher-cost cage-free egg and the lower-cost non-cage-free egg,” Coit said. “The reality is most people are still buying the cheaper egg.”

Austin Alonzo is a reporter at WATT Global Media. To contact Alonzo, email aalonzo@wattglobal.com.