Study on the socio-economic implications of the various systems to keep laying hens

Study on the socio-economic implications of the various systems to keep laying hens Contract SANCO/2003/SPC.2003258 Final Report for The European Commission Submitted by Agra CEAS Consulting Ltd. Telephone: *44 (0)1233 812181 Fax: *44 (0)1233 813309 E-mail: info@ceasc.com http://www.ceasc.com/ 2120/CC/December 2004

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS Contents S1. EXECUTIVE SUMMARY...V 1. INTRODUCTION... 1 2. EGG PRODUCTION... 3 2.1. THE STRUCTURE OF THE EU EGG INDUSTRY... 3 2.1.1. Production... 3 2.1.2. Egg industry... 15 2.2. EGG PRODUCTION SYSTEMS IN USE... 18 2.3. TECHNICAL DATA... 19 2.3.1. Calculating technical data... 19 2.3.2. Member State data... 21 2.3.3. Weighted average EU data... 28 2.4. PRODUCTION COSTS... 31 2.4.1. Calculating production costs... 31 2.4.2. Member State data... 33 2.4.3. Weighted average EU cost data... 44 2.5. PRODUCER GROSS MARGINS... 46 2.5.1. Calculating gross margins... 46 3. EGG MARKETS... 55 3.1. MARKET SHARE OF EGGS PRODUCED UNDER ALTERNATIVE SYSTEMS... 62 4. TRADE... 65 5. THIRD COUNTRIES... 77 5.1. OVERVIEW... 77 5.2. DISCUSSION OF TECHNICAL FACTORS... 78 5.3. DISCUSSION OF VARIABLE COSTS... 78 6. THE SOCIO-ECONOMIC IMPACT OF DIRECTIVE 1999/74/EC... 81 6.1. IMPLEMENTATION TO DATE... 81 6.2. EXPECTED IMPLEMENTATION... 81 6.3. IMPACT ON THE INDUSTRY... 82 7. ECONOMIC IMPACT OF POTENTIAL CHANGES AFFECTING THE EGG SECTOR... 87 7.1. EQUILIBRIUM DISPLACEMENT MODELS: AN OVERVIEW... 87 7.1.1. EDM Model Specification... 89 7.1.2. Data parameters and elasticities... 90 7.2. SCENARIO RESULTS... 91 7.2.1. Production costs... 91 7.2.2. Demand structure... 94 7.2.3. Trade flows... 98 7.2.4. Combined Scenarios... 99 7.3. SUMMARY... 104 i

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS Acknowledgements The authors would like to thank the project Steering Group for their advice and assistance in carrying out this research. It would not have been possible to conduct this project without the help of members of the egg industry, representatives from other interested organisations and governments throughout the EU and in the third countries considered. This assistance was greatly appreciated by the authors. The authors would also like to thank Xueyan Zhao (Monash University) for providing her SHAZAM computer code used to run her EDMs and Kelvin Balcombe (Imperial College) for his help in preparing GAUSS code to run the models employed in this research. iii

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS S1. Executive summary This study assesses the socio-economic impact of Directive 1999/74/EC and in particular the potential implications of the 2012 ban on traditional caged production. It has been conducted in line with the Terms of Reference of a contract issued to Agra CEAS Consulting in late 2003. The study was conducted in the period October 2003 to December 2004 1 and involved extensive desk as well as field research in all EU-15 Member States as well as in five third countries (Brazil, India, Mexico, Ukraine and the United States). Limited additional research was also undertaken in respect of Poland and Switzerland. During the first phase of the research data was collected on the structure of the egg production sector in each EU-15 Member State, the main operators and levels of concentration in the sector, costs of production by type of production system as well as trade and market demand. Similar differences are apparent in the type of egg production systems which prevail. While the traditional battery cage remains the predominant production system across the EU accounting for over 85% of laying hen places (apart from Sweden where national legislation has banned the use of such cages), in some Member States (e.g. Austria, Denmark, Ireland, Netherlands, Sweden and the UK) alternative non-cage systems now account for a substantial (in Sweden s case over 50%) share of output. This is in marked contrast to the position in the third countries reviewed where, apart from the voluntary adoption of limited animal welfare improvements in the US, almost all commercial output takes place in battery cages with space allowances per bird often below the 550 cm 2 currently used in the EU. The evidence collected during this stage highlights the fact that due to their differing historical evolution and legislative frameworks, production structures and the prevalence of particular production systems varies widely between Member States. Thus some Member States (e.g. Germany, UK, Netherlands and France) show a high degree of vertical integration along the chain from producer to packer to processor. These Member States will also generally tend to have relatively large production units (as do Italy and Spain) while in other Member States production units tend to be more fragmented and less integrated (e.g. Austria, Greece, Ireland, Portugal). In terms of production costs there are also significant variations between Member States, but more importantly between different production systems. Thus the traditional battery cage which has evolved over the past three decades has a substantial advantage in cost terms over alternative noncage systems (barn, free range, organic) largely due to lower labour, land and feed requirements. Little evidence on costs for commercial production from enriched cages as required by Directive 1999/74/EC is as yet available, but the limited evidence obtained from producers with experience of 1 The study therefore commenced before the ten new Member States entered the Community on 1 May, 2004 and consequently a full industry profile is not presented for each of these countries. v

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS both systems suggests that the enriched cage system will not operate at a significant cost disadvantage to the traditional battery cage. Overall and per capita consumption of eggs in the EU-15 has been rising since the mid-1990s and per head use now stands at some 14.2 kg egg per year. The bulk of eggs in all markets are sold as shell eggs via the food retailing sector, but as consumer food purchasing and usage have shifted, increasing proportions of egg output are delivered to the consumer via food service (catering) outlets as well as in the form of processed products. The EU-15 as a whole produces just over 100% of its domestic egg requirements and is a marginal net exporter of eggs. Imports are limited by border protection in the form of duties on shell eggs and processed products. This picture is not expected to change significantly within the EU-25 as most of the ten new Member States are also net exporters of eggs and egg products. A review of progress towards the 2012 ban on unenriched cage production indicates that to date limited progress has been made in that most producers are awaiting the outcome of the review of the Directive in 2005. Thus, with the already noted exception of Sweden, there is only limited production in enriched cages which are thought to be the most likely production system traditional battery cage producers would move towards in the first instance. The sector takes the view that the widespread adoption of this system, or a move to alternative systems, will not occur much before the 2012 deadline. They also take the view that the ban on unenriched cages will accelerate restructuring in the sector as older producers will no longer be willing to invest in new installations, particularly if current border protection is not maintained and lower cost eggs, and especially egg products, enter the market on a more competitive basis. Retailers generally took the view that there was unlikely to be a large demand led shift towards eggs from non-caged outlets in the medium-term, although it was noted that surveys of consumers do suggest that at present there may be unrealised potential in this regard. These potential socio-economic impacts were tested through the construction of an econometric model of the EU-25 egg sector which analysed the economic impact of a range of alternative scenarios for the sector. The scenarios tested include changes in costs deriving from a shift in production system or other factors, reductions in border protection and changes in the type of eggs being demanded. The extensive range of scenarios for change reviewed provide a useful guide to the direction and magnitudes of potential producer and consumer losses and gains as well as the tradeoffs involved in relation to a range of policy and market development possibilities. The results are as would be expected a priori in that, for example, there are overall economic gains to consumers from a liberalisation of trade, but substantial losses for producers. Specifically as regards the assessment of the likely impact of an increase in costs as might occur if there were to be a shift into alternative egg production systems as a result of the implementation of the battery cage ban mandated for 2012 under Regulation 1999/74, the model indicates that for a 20% increase in such costs, which is the magnitude of percentage increase in terms of variable cost producers are likely to face as a result of switching to free range production (slightly more than half vi

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS this (12%) for barn production), the industry will potentially suffer a loss of producer surplus of 315 million (EU-15) and 354 million (EU-25). However, many producers are likely to switch to enriched cage production which will entail a smaller increase in production costs and will therefore mitigate this loss to some extent. It should also be noted that under this scenario as costs increase quantities imported increase (by up to between 3-4% for a 20% increase in feed costs). This does not, however, significantly affect the overall scenario results because the quantity of eggs currently traded is very small in relation to the size of the overall egg market. In this context it should be borne in mind that these estimations of producer and consumer surplus measure only market effects and do not take into account the potentially much larger non-market benefits that society derives from improved animal welfare. vii

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS 1. Introduction According to Article 10 of Directive 1999/74/EC the Commission is expected to present a report on the various systems for keeping laying hens outlined in the Directive taking into account the socioeconomic impact. In order to prepare for this report Directorate-General Health and Consumer Protection (DG SANCO) awarded this contract to study the issues involved to Agra CEAS Consulting in October 2003. The research programme was split into two stages. The first stage provides an analysis of the current situation in the EU 2 egg sector and in particular comments on progress to date and possible implications of a move towards implementation of the ban on unenriched cages in line with Chapter II, Article 5.2 of the Directive. It also provides a detailed overview of the production costs and production systems in place in the EU and a number of third countries. The second stage uses an EU-wide sector model to provide an assessment of the likely socio-economic impact of a range of scenarios for the sector when the prohibition on production in unenriched cage systems applies from 1 January 2012. It should be noted that this research is not intended to address or make any judgement on the welfare aspects of the different systems of keeping laying hens, nor does it address the veterinary and human health issues arising from these different systems. This document presents our report on both stages of this research as specified in the terms of reference. The research for this project has been conducted by Dr. Dylan Bradley and Conrad Caspari of Agra CEAS in conjunction with Pedro Serrano and Isabel Ribeiro of AgroGes in Portugal, Lola Lyberopoulos of Hypodomi in Greece, Laura Berende-Verhoeven in the Netherlands and Lynn Daft of Promar International in the United States, Arina Korchmaryov in the Ukraine and Wieslaw Lopaciuk in Poland. The modelling work was undertaken by Dr. Iain Fraser, Senior Lecturer at Imperial College, London. It has been undertaken by means of extensive desk research in the period January to July 2004 and interviews in all the countries under review. We would like to take this opportunity to thank all those who assisted us in this effort. It should be noted that official statistics covering the EU poultry and egg sector are not as complete as for other livestock sectors such as beef, pork, sheep/goats and milk and dairy products. This is due to the almost complete lack of EU legislation requiring collection of statistics relating to the sector. The report therefore provides as much data as possible at an EU level but considerably more data is presented from our extensive field research and from national sources. In this context, we also note that where possible we have presented data covering the whole of the EU-25, but that in line with the ToR, the bulk of the data collected relates to the EU-15 as the research took place 2 For the purposes of this report it should be noted that unless explicit reference is made to the EU-25 the terms EU and EU-15 refer to the Union as constituted prior to 1 May 2004. The term EU-25 refers to the EU as it is currently constituted and the term EU-N10 refers to the ten Member States which acceded to the Union on 1 May 2004. The term EU-12 refers to the EU as constituted prior to the accession of Austria, Finland and Sweden. 1

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS prior to the expansion of the Union on May 1, 2004. However, we have included a detailed analysis of the Polish egg sector as it has the largest sector in the new Member States. 2

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS 2. Egg production 2.1. The structure of the EU egg industry 2.1.1. Production The EU-25 produced 6.349 million tonnes of eggs for human consumption in 2003, an increase of 10% since 1995 (Figure 2.1). Production increased annually between 1996 and 2001 from 5.722 million tonnes to 6.324 million tonnes (despite the outbreak of avian influenza in Italy in 2000). Since then, production has declined slightly (avian influenza in the Netherlands and Belgium in 2003 is likely to have influenced this to some extent). The EU-25 series most closely tracks the EU-15 data and production in the new Member States moved counter to the EU-15 trend up to 2002 although followed the EU-15 in 2003. The new Member States have generally accounted for between 15% and 17% of EU-25 production. 7000 6000 5000 Production ('000 tonnes) 4000 3000 2000 1000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 EU-15 production EU-N10 production EU-25 production Figure 2.1: Production of eggs for human consumption in the EU-25 1995-2003 Note: For the new Member States, the production of eggs for human consumption was calculated by subtracting an estimate of the production of hatching eggs from total production. Source: DG Agri. 3

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS The production of eggs for human consumption in the EU-15 in 2003 is shown by Member State in Figure 2.2 3. The main producer in 2003 was Spain (although see Figure 2.5 below). France, Germany, Italy and the UK follow. Between them these top five producing Member States accounted for 79% of EU-15 production. The main change from 1990 is that Spain was not then in the top five although the Netherlands was. The top five producing Member States accounted for 51% of EU-12 production in 1990 4 (see Figure 2.3). Portugal 2% Netherlands 7% Italy 14% Spain 20% Sweden 2% United Kingdom 13% Austria 2% Belgium 3% France 17% Denmark 1% Finland 1% Ireland 1% Greece 2% Germany 15% Figure 2.2: EU-15 production of eggs for human consumption 2003 Note: production in the Netherlands and Belgium was affected by avian influenza. Source: DG Agri. 3 Data are not available for Luxembourg, although such production is likely to be at a very low level. 4 They accounted for the same proportion of EU-15 production in 1991. 4

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS United Kingdom 15% Belgium 4% Denmark 2% France 18% Spain 14% Portugal 2% Germany 14% Netherlands 14% Italy 13% Greece 3% Ireland 1% Figure 2.3: EU-12 production of eggs for human consumption 1990 Source: DG Agri. Figure 2.4 shows the same information for the EU-N10 in 2003. Almost half of the total egg output of the new Member States was produced in Poland. Approximately one-fifth was produced in Hungary and one-sixth in the Czech Republic. Between them these three countries accounted for 80% of total EU-N10 production in 2003. 5

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS Slovak Repulic 7% Slovenia 2% Cyprus 1% Czech Republic 16% Estonia 2% Poland 45% Hungary 18% Lithuania 5% Malta 1% Latvia 3% Figure 2.4: EU-N10 production of eggs for human consumption 2003 Note: The figures were calculated by subtracting an estimate of the production of hatching eggs from total production. Source: DG Agri. Production of eggs for human consumption in the EU-25 in 2003 is shown by Member State in Figure 2.5. Only Member States with more than 5% of total EU-25 production are shown separately. Spain was the most important producer (17%), followed by France (15%), Germany (12%), Italy (12%) and the UK (11%). Poland comes sixth with a 7% share in total EU-25 production in 2003 and is the only new Member State with a more than 5% share. Hungary and the Czech Republic, the other main egg producers in the new Member States account for 3% and 2% respectively of EU-25 production and are therefore not shown separately. 6

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS Other EU-N10 8% France 15% Other EU-15 12% Poland 7% Germany 12% UK 11% Italy 12% Spain 17% Netherlands 6% Figure 2.5: EU-25 production of eggs for human consumption 2003 Note: Only those Member States with a share of more than 5% in total egg production are labelled. The figures for the new Member States were calculated by subtracting an estimate of the production of hatching eggs from the total production. Production in the Netherlands and Belgium was affected by avian influenza. Source: DG Agri. Figure 2.6 presents an index of production (where 1990 = 100) to illustrate changes in Member State production in the EU-15 between 1990 and 2003. The main point to note is the large increase in production in Spain between 2002 and 2003 which took it from being the third largest producer with 11% of total EU-15 production in 2002 to largest producer in 2003 accounting for 15% of EU-15 production. Other points to note are that production increased in Germany by 18% over the period, in Italy by one-third, in France by 11% and in the UK by 7%. Production in the Netherlands decreased by 37%, although this was largely the result of avian influenza in 2003. Production in Finland and Austria declined by 15% and 14% respectively over the period shown. 7

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS 180 160 Index of production (1990 = 100) 140 120 100 80 60 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Austria Belgium Denmark Finland France Germany Greece Ireland Italy Netherlands Portugal Spain Sweden United Kingdom Figure 2.6: Index of production of eggs for human consumption, EU-15 1990 to 2003 (1990 = 100) Note: Austria, Finland and Sweden are based on 1991 rather than 1990. Source: DG Agri. 8

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS An index of production (where 1995 = 100) for the 10 new Member States is shown in Figure 2.7 to illustrate changes in national production between 1995 and 2003. An increase in egg production over the period occurred in Poland (+31%), Latvia (+31%), Cyprus (+28%), Slovenia (+21%), Lithuania (+13%) and the Czech Republic (+10%). In Hungary, production fell by 8% between 1995 and 1999, but by 2003 had increased again to a level slightly over the 1995 production volume. In Malta, the Slovak Republic and Estonia, egg production decreased over the period (by 26%, 24% and 22% respectively). 9

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS 150 140 130 Index of production (1995 = 100) 120 110 100 90 80 70 60 1995 1996 1997 1998 1999 2000 2001 2002 2003 Cyprus Czech Republic Estonia Hungary Lithuania Latvia Malta Poland Slovenia Slovak Repulic Figure 2.7: Index of production of eggs for human consumption in EU-N10 1995 to 2003 (1995 = 100) 10

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS Between 1995 and 2003, the relative importance of the various countries individual output in total EU-N10 production remained relatively unchanged. Poland was the most important producer over the whole period, followed by Hungary and the Czech Republic. This pattern was only broken in 1998 and 1999, when Czech egg production exceeded Hungarian output. The share in total EU-N10 output of the top three producing countries increased from 75% in 1995 to 80% in 2003. Figure 2.8 presents the structure of the EU-15 flock in 2000 in terms of laying hen places by different flock size categories. Almost two thirds (65%) of laying hen places were in flocks in excess of 30,000 birds suggesting that production in the EU-15 is typically fairly large-scale in nature. A similar classification of producers shows that 98.0% have less than 100 hens. Less than 0.5% of producers (just over 3,000 individuals) have flocks in excess of 30,000 birds. Comparing 2000 data with 1995 data shows that there are now fewer and larger holdings with a greater number of laying hen places on larger units. Directive 1999/74/EC will therefore only affect a small proportion of EU-15 egg producers as those with fewer than 350 birds are exempt from its requirements. However, it will cover the bulk of the laying flock. 300 250 Number of laying hens (millions) 200 150 100 50-1-99 100-2,999 3,000-9,999 10,000-29,999 30,000+ Flock size categories Figure 2.8: Structure of the EU-15 flock in 2000 Source: EU Farm Structure Survey (2000). The average size of flocks with more than 100 birds increased by 31% between 1995 and 2000 from 8,624 to 11,313 reflecting the increasing concentration in the sector. The average number of laying hens per unit with more than 30,000 laying hen places increased from 78,138 to 86,010 (10%) over the same period. The average numbers of hen places in the other size groups was virtually unchanged providing further evidence for concentration in the sector. 11

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS Average flock size has increased in most EU-15 Member States over the 1990s, with the exception of Austria where average flock size fell by 10% between 1995 and 2000. The largest increases took place in Portugal (148%), Denmark (123%) and Finland (111%), although in the latter two cases the average size still remained below the EU-15 average even after these large increases. Average flock sizes are presented by Member State in 2000 in Figure 2.9 where only laying hens in flocks with at least 100 birds are included. 25,000 20,000 Average flock size 15,000 10,000 5,000 - Austria Belgium Denmark Finland France Germany Greece Ireland Italy Netherlands Portugal Spain Sweden United Kingdom EU-15 Figure 2.9: Average flock sizes in 2000 Note: holdings with less than 100 birds are excluded. Source: EU Farm Structure Survey (2000). Figure 2.10 presents the proportion of EU-15 Member State flocks held in units with more than 30,000 birds in 2000. The average for the EU-15 is 65% and the largest proportions are found in Spain, Italy, Portugal and Germany. In contrast the smallest proportions are located in Finland, Austria, Greece and Ireland. 12

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS 80% 70% Proportion of laying hens in flocks of 30,000+ 60% 50% 40% 30% 20% 10% 0% Austria Belgium Denmark Finland France Germany Greece Ireland Italy Netherlands Portugal Spain Sweden United Kingdom EU-15 Figure 2.10: Proportion of laying hen places on units with more than 30,000 hen places Source: EU Farm Structure Survey (2000). Bringing together some of the data above it is possible to classify the EU-15 egg sectors into different groups. Figure 2.11 presents the number of laying hens plotted against the average flock size. The average number of laying hens and the average flock size in the EU-15 is marked. This shows that France, the Netherlands, Italy, Spain and the UK have large national flocks kept in large units. Germany, on the other hand, has a large national flock, but a relatively fragmented structure. Sweden and Finland have small flocks, but a concentrated structure. Finally, Greece, Ireland, Austria, Portugal, Belgium and Denmark have small national flocks and a fragmented structure. 13

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS 90 80 Large, fragmented sector France Large, concentrated sector 70 Number of laying hens (millions) 60 50 40 30 Germany EU-15 Netherlands Italy Spain UK Small, fragmented sector 20 Small, concentrated sector Belgium Greece 10 Austria Portugal Ireland Denmark Sweden Finland 0-5,000 10,000 15,000 20,000 25,000 Average flock size Figure 2.11: Number of laying hens versus average flock size Note: average flock size excludes flocks with less than 100 hens. Source: EU Farm Structure Survey (2000). Figure 2.12 presents the number of producers versus average flock size. This allows classification according to concentration without reference to total flock size. Under this classification, Sweden and Finland join the UK and the Netherlands as the most concentrated sectors, i.e. the sector with the least producers and the largest average flocks. The egg sectors in France, Italy and Spain are also concentrated, but have a larger producer base. Greece and Portugal have the largest producer bases and the smallest average flock sizes suggesting that they have large, fragmented egg sectors. Ireland, Belgium, Denmark, Austria and Germany have smaller than average producer numbers and are also relatively fragmented. 14

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS 1000 Greece Large producer base, fragmented structure Italy Large producer base, concentrated structure Number of producers (thousands) (logarithmic scale) 100 10 Ireland Austria Belgium Portugal Germany Denmark EU-15 France Sweden Spain UK 1 Small producer base, fragmented structure Netherlands - 5,000 10,000 15,000 20,000 25,000 Average flock size Finland Small producer base, concentrated structure Figure 2.12: Number of producers versus average flock size Note: average flock size excludes flocks with less than 100 hens. Source: EU Farm Structure Survey (2000). 2.1.2. Egg industry The general structure of the industry varies greatly between Member States and is partially reflected by the varying concentration levels at different points in the marketing chain. In some countries substantial portions of this chain are integrated in that pullet rearing, feed supply, production, processing and marketing to the retailer are all in the hands of a single company or co-operative. Prime examples of this would be Deutsche Frühstücksei in Germany, Eurovo in Italy, Deans Foods in the UK and Danæg A/S in Denmark all of which own and pack a significant proportion of national production, packing and processing as well as generally having their own pullet rearing and feed compounding capacity. At the other end of the scale would be countries like Portugal and Greece where a relatively fragmented production structure is accompanied by a marked lack of concentration at the packer level. In other countries such as Austria, producer groups play a significant role in the marketing of the eggs. In most countries, however, packer concentration is relatively low and producers will either own their own packing station or have arrangements to sell to independent packers who will bundle supplies on short-term supply or price contracts from a relatively limited number of producers. 15

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS The 2003 four and eight firm concentration ratios 5 in the egg packing sector are presented in Figure 2.13. The most concentrated packing sectors are in France and Denmark where the CR-4 is 99.0% and 97.6% respectively. The sectors in Finland, Ireland, Sweden, the UK and Italy are all more concentrated than the EU-15 average, with least concentration evident in Greece, Spain and Portugal. In the vast majority of cases the packing sectors are more concentrated now than they were a decade ago as larger companies have acquired smaller ones and mergers have taken place. Finland is an example where concentration has decreased as some (now significant) players were established after accession. 100.0% 90.0% 80.0% 70.0% Concentration ratio 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Austria Belgium Denmark Finland France Germany Greece Ireland Italy Netherlands Portugal Spain Sweden UK EU-15 CR-4 CR-8 Figure 2.13: Four and eight firm packer concentration ratios by Member State, 2003, (% share of market held by respectively top 4 (CR-4) and top 8 (CR-8) companies) Notes: Data for top four companies concentration ratio (CR-4) in France refers the top 3 companies only as data for top 4 and top 8 (CR-8) in France is not available. Data for CR-4 in Sweden refers to top five companies, CR-8 in Sweden is not available. Source: Industry estimates and Agra CEAS Consulting calculations. An indication of the significance of the processing sector is provided by the data in Table 2.1 which shows the number of eggs broken for processing as a percentage of domestic egg production. Using this limited data suggests that up to 24% of eggs produced in the EU-15 are broken for processing (in 5 A concentration ratio (CR) is a measure of the market share accounted for by a particular number of enterprises in a sector or subsector. Thus the term CR-4 indicates the market share held by the largest four enterprises the term CR-8 indicates the market share held by the largest eight enterprises. 16

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS reality this figure is lower as some eggs are imported from third countries for processing in the EU- 15). It is estimated that in the 10 new Member States on average 10% of total egg output is processed 6. Table 2.1: Eggs broken for processing as proportion of egg production 2002 Total egg production ( 000 tonnes) Eggs broken ( 000 tonnes) Proportion of eggs broken for processing Austria 88 Belgium 200 40 20% Denmark 77 27 35% Finland 59 4 7% France 1,026 359 35% Germany 890 222 25% Greece 120 0% Ireland 37 6 16% Italy 963 337 35% Netherlands 650 162 25% Portugal 118 0% Spain 615 62 10% Sweden 103 21 20% UK 671 134 20% EU-15 5,617 1,374 24% Note: Figures for eggs broken for processing and total production may not match data from other sources. Source: EPEGA. Figure 2.14 presents processor concentration ratios for four and eight firms. The processing sector is much more concentrated than the packing sector with many Member States (Sweden, Finland, Denmark, Portugal, Greece, Austria, Belgium and Ireland) having fewer than four processors. All EU- 15 Member States do, however, have at least one processing facility. Where processors are limited in number they tend to focus on breaking second quality eggs, mainly for the domestic market, and usually liquid products only. Often these liquid products include blends and mixes in order to capture greater value-added. The drying sector is being increasingly concentrated and many smaller scale processors have stopped this activity in the face of competition. For example, even in the UK, which is a reasonably large sector, there are no longer any drying facilities. 6 Impact de l elargissement de l UE en 10 nouveaux Etats Membres, Ofival, 2004. 17

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS 100% 90% 80% 70% Concentration ratio 60% 50% 40% 30% 20% 10% 0% Austria Belgium Denmark Finland France Germany Greece Ireland Italy Netherlands Portugal Spain Sweden UK EU-15 CR-4 CR-8 Figure 2.14: Four and eight firm processor concentration ratios by Member State, 2003, (% share of market held by respectively top 4 (CR-4) and top 8 (CR-8) companies) Notes: 1 Data for Italy CR-8 refers to top 7 processors. 2 Belgian CR-4 refers to top 5 processors. Source: Industry estimates and Agra CEAS Consulting calculations. 2.2. Egg production systems in use The primary source for data on the types of egg production system in use are the statistics DG Agri has compiled. Regrettably these are only complete to 2001 and there are some discrepancies with data collected at a national level. Using this as a basis, however, confirms that over the last decade there has been a substantial increase in the proportion of the EU laying hen flock held in alternative non-cage systems. Thus, inasmuch as there is data available, the share of the EU-15 laying hen flock held in alternative systems between 1993 and 2003 has risen from 3.56% to 11.93%. These averages conceal wide variations at national level with the southern Member States (Spain, Portugal, Italy, Greece) showing very low proportions of such systems of generally around 1-2% of the national flock, to Belgium and Finland at 4-5% and France and Germany 12-13%. On the other side of the spectrum is a large number of Member States with 20-30% of their flock in alternative systems. Within the alternative systems, free range systems are generally the most significant (outside the Scandinavian countries for climatic reasons) accounting for 48% of the alternative flock, followed by barn (deep litter and perchery) with 42% and semi-intensive systems (now incorporated with the free range category) with some 10%. Organic production generally accounts for a low 18

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS proportion (under 10%) of the overall total, but is important in some Member States, most notably Denmark. Specific differences between the EU legislation relating to production systems and national legislation are drawn out in the Member State reports (see Appendix 1). Within the new Member States the commercial egg production sector is dominated by cage based systems with recent estimates by ITAVI 7 in France suggesting that caged production accounts for 81% of commercial production in Poland (15% barn, 4% free range), 96% in Hungary (4% barn) and 97% in the Czech Republic (3% barn). 2.3. Technical data This Section presents technical egg production data for all Member States. From this data technical factors have been calculated at the EU level for each system using a weighted average according to the importance of each Member State at the EU level, as measured by the number of laying hens recorded in each system from the last available year of DG Agri data. Finally, a composite set of technical factors has been produced to take account of both the different systems in use in each Member State, and their relative importance, and the relative importance of egg production in each Member State in the context of the EU. This information is presented in the following sub-sections, preceded by an explanation of how this data was sourced and manipulated. 2.3.1. Calculating technical data Technical data were collected from respondents interviewed in each Member State 8. In some cases a national body such as the Danish Poultry Council collect information from their members which are then averaged, in other cases the data were estimated by a combination of respondents from national associations and large packers/producers. Where data have been provided from more than one source, averages have been used. The intention is to capture the situation in reality in each Member State, i.e. encompassing both large and small producers. Given the fact that there are often more small producers than large ones, but that these contribute a smaller proportion of total eggs produced, respondents were asked to consider typical production factors. This results in an approximation of the technical factors achieved by most producers in each Member State. The fact that there may be wide variations in the technical performance factors in similar production systems is because of the many differences in scale and type of buildings and equipment used, variations in feeding and management practice, etc. which exist across the EU. It should be stressed that in practice there will be a great deal of variation between producers. Also, because the data represents typical producers, it does not necessarily reflect the technical factors that the industry would be capable of achieving given large, modern facilities. The estimates will therefore tend to show where the industry typically is, rather than provide a guide as to what it 7 Institut Technique de l'aviculture. 8 The data presented here refers to EU-15 although data on Poland is contained in Annex 1. This is not included here as EC Dir. 1999/74 did not apply during the period under review. 19

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS might achieve. As producers invest in more modern facilities there is likely to be an improvement in certain technical factors (such as the number of birds that can be managed by one labourer, feed conversion ratios, etc.). Each technical factor is considered below: Laying cycle (days): this is the period over which the bird is laying eggs. Empty period (days): the period between flocks during which time the house is thoroughly cleaned. Feed/bird/day (grams): the feed requirement per bird per day. Feed/bird/year (Kg): this is calculated as the feed per bird per day multiplied by the laying cycle and then divided by the sum of the laying cycle and the empty period. This is then multiplied by 365 to present the information in terms of feed per bird per year. This calculation takes account of the fact that a laying house is empty for a proportion of time in any calendar year and when there are no birds there is no feed requirement. Eggs/bird/year: this is calculated as the number of eggs collected per bird per laying cycle divided by the sum of the laying cycle and the empty period, multiplied by 365 to annualise the data. The base data for this is generally corrected for mortality in that producers usually divide the total number of eggs produced in a house by the birds put in at the beginning. Kg feed per kg eggs: this is the feed per bird per year divided by the eggs collected per bird per year multiplied by 16 on the basis that a typical egg weight is 62.5 grams 9. This figure in annual terms is the same as that in laying cycle terms. Mortality (%): the percentage mortality over the complete laying cycle. It is not possible to present this figure in annual terms without knowing the distribution of mortality across the laying cycle. Number of hens managed per labourer: there will be a great deal of variation in this figure depending on the degree of automation possible. The figures provided are typical of the commercial laying sector in each Member State. In some cases laying houses tend to be small and looking after them would not be a full-time job. Space allowance per hen per cm 2 : the available space per hen. This follows the EU stocking density requirements with some exceptions where national legislation has tighter requirements (for example, Sweden) or where national derogations with respect to the requirement of Directive 1999/74/EC are currently in place (for example, in the UK where barn and free range systems may maintain stocking densities for facilities in production prior to August 1999 at 11.7 birds per square metre until 2012) 10. Hens housed per m 2 house: this figure takes account of the use of tiers by presenting how many hens are housed per square metre of floor space. It is the number of hens per metre (calculated from the space allowance in cm 2 ) multiplied by the number of tiers of cages. 9 It should be noted that the source data were collected in per dozen egg terms and that as national egg weights do differ by Member State expressing feed conversion in terms of egg weight may conceal these differences. The average weight of 62.5 grams per egg used for this calculation was specified by DG SANCO. 10 The Directive specifies that stocking density must be not more than 9 birds per square metre from 2007. 20

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS Pullet cost ( ): this is the cost of a pullet. Where it is common to rear birds rather than buy them in at point of lay this figure includes a profit element for the rearing enterprise. This figure is not annualised. End of lay hen weight (Kg): this figure is liveweight unless indicated. End of lay hen price ( ): this is the revenue generated by spent hens net of any associated costs. In many cases disposal of spent hens is a cost and where this is the case the figure is negative. This figure is not annualised. 2.3.2. Member State data Table 2.2 presents technical factors for traditional cage production for each Member State and the EU weighted average. As will be evident the data presented shows considerable variation between Member States which largely reflects the range of structural conditions as well as the particularities of the historical evolution of the sector in each of the Member States. Thus some Member States typically have large units (notably Belgium, Italy, Netherlands and the UK) whereas others (notably Austria, Denmark, Finland and Greece) tend to operate with smaller production units. The values presented represent the average of the views of those members of the industry spoken to and should be taken as typical of efficient/competitive producers rather than absolute. In some cases there was a great deal of variation and a range would be a more representative, although less comparable, way of presenting this data 11. Key points to note are as follows: feed per bird per day varies from 109 grams in France to 120 in Ireland and Portugal; average eggs collected annually (after mortality) range from 261 in Portugal to 293 in the Netherlands; feed conversion ratios in the more efficient sectors are 2.10 kg feed per kg eggs (the Netherlands) and 2.13 kg feed per kg eggs (France and Denmark) compared to 2.59 kg feed per kg eggs in Portugal and 2.41 kg feed per kg eggs in Austria and Ireland; mortality is as low as 4.0% in Ireland and Portugal, but reaches 7.5% in Spain and 7.0% in Italy; larger scale sectors such as Belgium, the Netherlands, Italy and the UK have a typical bird to labourer ratio of 50,000, whereas Ireland has a ratio of just 10,000 and Denmark just over 12,000; and, the end of lay hen price is positive in some Member States, but in some is actually a cost. Data for enriched cages is presented in Table 2.3. Data in this form was only available for the UK, Sweden, Belgium, and in the latter case is experimental only. For this reason EU-15 data has not been extrapolated. The examples for the UK and Sweden are drawn from very large producers with fully automated modern equipment and therefore represent the more efficient and large scale end of the likely range. The enriched system in the UK is currently being used with a 630 cm 2 space 11 Ultimately a full survey of a representative sample of producers across the EU, stratified by size and production system, would be necessary to be certain that the data are statistically representative. 21

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS allowance rather than the full 750 cm 2 until 2012 when egg production in unenriched cages will be prohibited. The UK figures are therefore not strictly comparable and are included because of the general paucity of information on enriched cages throughout the EU. A final word of caution is that because the data used for enriched cages is taken from a very limited number of sources compared to that for traditional cages, comparisons between the two are not meaningful as the former is not of the same degree of robustness as the latter. Table 2.4 to Table 2.6 present technical data for barn, free range and organic systems respectively where this information is available. A key point to note for all systems is that whilst there is a high degree of variability between Member States, there will also be significant variation between producers within Member States. This means that although there are differences in certain factors, for example, average feed conversion, between Member States, in reality for each factor there is a range around the average and the majority of this range will overlap between Member States. It is not therefore meaningful to seek explanation for most of the apparent differences in the averages. That said, some differences are likely to be meaningful, for example, the number of birds managed by one labourer which will reflect general levels of mechanisation and hens housed per square metre of house which reflects the typical number of tiers of cages used which reflects the typical scale of operations. Pullet cost will vary according to the cost of feed and will therefore be lower towards the centre and higher around the periphery of the EU. Finally, the value of spent hens is determined by the market for spent hen meat and where this is minimal or non-existent a cost is incurred. Feed requirements per bird (and feed conversion) are lowest in the traditional cage systems and highest in organic and free range systems. Generally the more freedom a bird has to move about the more energy it needs. As bird density decreases more energy will also be needed in order to keep warm. The number of eggs collected per bird per year is highest in the caged system and gets progressively lower through barn and free range to organic. 22

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS Table 2.2: Traditional caged system technical and cost factors of production (2003) Austria Belgium Denmark Finland France Germany Greece Ireland Italy NL Portugal Spain UK EU-15 Laying cycle (days) 406 392 392 364 352 406 355 396 395 400 378 392 406 388 Empty period (days) 14 21 28 42 19 14 50 19 25 16 35 28 18 22 Feed/bird/year (Kg) 40.58 40.95 38.50 37.30 37.58 39.52 36.18 41.59 37.80 38.52 41.54 39.11 40.98 38.83 Feed/bird/day (g) 115 112 113 114 109 112 110 120 110 110 120 115 115 112 Eggs/bird/year (collected) 269 282 289 278 282 275 270 276 278 293 256 282 282 280 Kg feed per kg eggs 2.41 2.24 2.13 2.15 2.13 2.30 2.14 2.41 2.18 2.10 2.59 2.22 2.33 2.22 Mortality (%) 6.0% 6.2% 5.7% 5.2% 4.9% 6.0% 4.5% 4.0% 7.0% 6.5% 4.0% 7.5% 4.3% 6.0% Number of hens managed/ labourer 10,000 50,000 12,308 15,000 30,000 20,000 16,500 10,000 50,000 50,000 40,000 30,000 55,000 36,461 Hens housed per m 2 house* 18 50 18 55 73 18 55 18 109 109 73 111 72 78 Space allowance per hen per cm 2 550 550 600 550 550 550 550 550 550 550 550 450 550 534 Pullet cost ( )** 3.40 2.90 3.75 4.20 3.10 3.32 3.65 3.45 3.10 3.43 2.85 2.70 3.51 3.17 End of lay hen weight (Kg) n.a. n.a. n.a. n.a. 1.96 n.a. 1.75 1.90 2.05 1.70 1.95 2.00 1.89 1.50 End of lay hen price ( ) 0.10 0.05 0.04-0.20 0.33 0.10 0.15-0.25 0.26 0.31 0.02 0.18-0.10 0.18 Note: * This figure is the space allowance per m 2 multiplied by the number of tiers commonly used. The more tiers the more hens per m 2 of floor space. ** Pullet costs in Spain and Portugal are at 16 weeks rather than 18 and are therefore lower. This reflects the high degree of vertical integration in that many producers breed their own pullets. Source: Industry estimates and Agra CEAS Consulting calculations. 23

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS Table 2.3: Enriched caged system technical and cost factors of production (2003)¹ Belgium Sweden UK Laying cycle (days) 392 532 424 Empty period (days) 21 28 18 Feed/bird/year (Kg) 40.71 30.63 40.91 Feed/bird/day (g) 111 115 115 Eggs/bird/year (collected) 285 238 274 Kg feed per kg eggs 2.20 2.06 2.39 Mortality (%) 4.0% 5.4% 4.0% Number of hens managed/labourer 50,000 40,000 72,500 Hens housed per m 2 house 12 40 95 Space allowance per hen per cm 2 750 750 630 Pullet cost ( ) 3.15 3.92 3.41 End of lay hen weight (Kg) n/a 1.85 1.90 End of lay hen price ( ) 0.05-0.22-0.07 ¹Note Belgium data derived from research results, Sweden and UK data from units which are relatively large and UK system would not fully comply with post 2012 requirements for enriched cages ---see also Section 2.3.2. Source: Industry estimates and Agra CEAS Consulting calculations. 24

THE SOCIO-ECONOMIC IMPLICATIONS OF THE VARIOUS SYSTEMS TO KEEP LAYING HENS Table 2.4: Barn system technical and cost factors of production (2003) Austria Belgium Denmark Finland France Germany Greece Ireland Italy NL UK EU-15 Laying cycle (days) 413 392 364 350 327 413 355 385 360 385 392 382 Empty period (days) 28 21 28 42 26 28 80 10 40 21 21 25 Feed/bird/year (Kg) 41.02 45.89 42.03 38.33 39.81 41.02 35.22 43.05 40.61 41.89 44.86 41.65 Feed/bird/day (g) 120 125 124 118 118 120 115 121 124 121 125 121 Eggs/bird/year (collected) 246 266 269 267 261 265 222 277 249 284 261 269 Kg feed per kg eggs 2.67 2.66 2.50 2.30 2.44 2.48 2.53 2.48 2.61 2.36 2.75 2.49 Mortality (%) 8.0% 9.3% 9.7% 6.6% 11.6% 8.0% 4.5% 5.0% 13.0% 9.0% 7.3% 9.1% Number of hens managed/labourer 5,000 15,000 8,807 2,500 8,000 20,000 6,250 7,000 20,000 25,000 14,333 17,420 Hens housed per m 2 house 7 12 9 7 7 7 9 7 9 7 12 8 Space allowance per hen per cm 2 1,429-1,111 1,429 1,429 1,429 1,111 1,429 1,111 1,429 855 1,271 Pullet cost ( ) 3.90 2.90 4.34 4.20 3.20 3.58 3.70 3.85 3.10 3.76 3.75 3.63 End of lay hen weight (Kg) n/a n/a n.a. n.a 1.91 n/a 1.90 2.20 1.80 1.80 1.87 1.21 End of lay hen price ( ) 0.10 0.05 0.13-0.20 0.26 0.10 0.15-0.30 0.26 0.36-0.11 0.18 Source: Industry estimates and Agra CEAS Consulting calculations. 25