Avian flu in Midwest hits egg prices, and may hit harder

More than 8 percent of the 300 million-plus U.S. layer hen population has disappeared in a month.

Daybreak Farms sits off a mile-long gravel road in Eagle Grove, Iowa, surrounded by freshly planted fields stretching in every direction.

Recently the multibuilding complex has also become host to a bevy of patrol cars fanning out from its entrance to the road's access point, with tense officials at the ready to shoo away would-be visitors.

Across the Hawkeye State, this scene has become alarmingly common. Dozens of farms—and the roads surrounding them—shuttered to the outside world, quarantined indefinitely as a highly pathogenic strain of avian influenza rips through the region.

Less than a month ago, Daybreak claimed 2.8 million egg-laying chickens; now it's one of a mounting list of large-scale commercial poultry facilities that have fallen victim to the worst bird flu outbreak in U.S. history.


Chickens gather around a feeder at a farm in Iowa.
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Chickens gather around a feeder at a farm in Iowa.

Since December, more than 33.5 million turkeys and chickens have been destroyed or are scheduled to be destroyed, with 162 farms (and counting) confirmed hit by the virus across 16 states. Indiana and Nebraska both reported their first cases this week.

"Layer hens," which supply the country's eggs, have been hit hardest: More than 8 percent of the 300 million-plus U.S. layer hen population has disappeared in a month. (Tweet This)

The situation is particularly painful in Iowa, which is in the process of destroying more than 25 million chickens and turkeys. "We haven't seen anything like this, at least on the poultry side," said Bill Northey, secretary of Iowa's Department of Agriculture.

Read MoreInside Sunrise Farms' avian flu chicken slaughter

He noted that 1 in 3 layer hens in the state has come offline due to the flu—a worrisome stat for the country's top egg-producing state. Northey conceded that it's likely to result in lost business for local companies and lost revenue for Iowa's coffers.

With so much of the nation's supply abruptly yanked from the market, prices have started to soar. According to data from commodity analysis firm Urner Barry, the price of a dozen wholesale large Midwest shell eggs—the ones ultimately found at the store—has increased over the past three weeks by 36 percent, or 43 cents, to $1.62.

But the price of "breaker" eggs—the ones removed from their shells and used in other foods—is jumping even more dramatically: The price of a pound of liquid whole egg, an industry benchmark, is up 90 percent over the same period. Other types of processed egg products have already hit records, as prices double.

"Over half of all egg processors are in Iowa, so we're likely to see the ingredient market be even more greatly impacted than the shell market," Northey said.

"Once we get rid of the issue, how long will it take to clean the facility up? That is a key component we are keeping our eye on." -Joseph Kerns, president, Kerns & Associates

More than half of Iowa's egg producers cater to the breaker market, with many facilities operating as all-in-one shops: Hens lay eggs that move along conveyor belts to an in-house "breaker" facility that processes them on site before shipping the product out to food industry customers.

When one of these facilities gets infected with bird flu, it's a double-whammy. First, millions of birds are lost, many with as much as two years of laying time left that were not budgeted to replaced yet; second, the infrastructure comes offline as well, diminishing the overall processing capacity of the entire industry.

Urner Barry estimates that 85 percent of Iowa's flu-affected flocks serviced the egg products sector. Their elimination has taken out a quarter of the breaker egg market's supply.

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Without their suppliers (and the longer-term contracts that had been in place), food companies are scrambling to secure new supply in the spot market, turning to farms that have typically catered to the retail market—grocery stores and consumers—instead of the food industry market.

Analysts expect that dynamic to push prices even higher—both for companies, which will likely absorb higher costs at the sake of margin erosion—and for consumers, who could start to see egg shortages in certain parts of the country if the outbreak continues to escalate.

"Participants in the cartoned market complex are placing limits on orders to their customers and restricting retail features for the immediate future," warned Brian Moscogiuri, a market reporter for Urner Barry, in a recent report. Still, for now at least, "retail customers have been able to acquire all of their contractual needs."

But the outbreak's still getting worse. On Thursday, Nebraska declared a state of emergency, joining Iowa, Minnesota and Wisconsin. Officials said the state now has two cases at facilities owned by the same company, totaling 3.5 million layer hens.

That company, which officials are not identifying, supplies Michael Foods, Post Holdings' egg production segment. Earlier this week, after news of the first Nebraska case, Post disclosed that 20 percent of its egg supply has been compromised.

Read MoreNebraska declares state of emergency over bird flu

None of these problems will go away anytime in the near future.

"Once we get rid of the issue, how long will it take to clean the facility up?" asked Joseph Kerns, president of Kerns & Associates, an Ames, Iowa-based agriculture industry consultancy firm. "That is a key component we are keeping our eye on."

For many farms, it could take a minimum of six months to dispose of birds, deem the property virus-free and then repopulate to the point of producing eggs again. But for some, it may take well over a year, especially since challenges already exist in terms of access to more young birds.