Egg quota sales drop significantly

Thursday, December 4, 2014

by JIM ALGIE

An 84 per cent drop in annual egg quota sales over the past five years may show the effect of a relatively new system for leasing production opportunities to willing producers rather than simply distributing them equally among quota holders.

It’s one possible conclusion from preliminary analysis by Egg Farmers of Ontario (EFO) of the Mississauga-based agency’s new quota exchange introduced in March, public affairs director Bill Mitchell said in an interview, Friday. Growers can expect to hear more exchange analysis at zone meetings scheduled for January with a complete report in time for the group’s annual meeting in March 2015.

“All indications are that egg farmers have really accepted and adapted quickly to the new system,” Mitchell said. In four exchanges held this year, quota values have held within a close range between $295 and $296 per unit. In Ontario’s supply management system for eggs, a unit of quota refers to the right to produce eggs from a single laying hen.

The number of completed transactions ranged between a high of seven at the first exchange in March to a low of only two in August, accounting for quota transfers of 16,003 and 3,042 units, respectively. However, the total number of transactions is well below the five-year average and part of a steady decline in quota transfers since 2009.

The new exchange was introduced to curtail rising quota values and to provide eligible farmers with fair and equal access to quota. The move comes with steady growth in both sales and production of eggs in Canada.

The board’s 2013 annual report highlighted approved quota increases for 2013 and 2014 at the equivalent of 582,127 hens. That followed a three per cent increase in retail sales, well above targets and the seventh year of consecutive growth. Since then, the growth pattern for egg sales has continued, Mitchell said.

“There’s been pretty strong and consistent growth in the egg market in the range of about three per cent for a number of years,” Mitchell said. Rather than distribute new production allotments by increasing quota to existing quota holders, however, EFO distributes it through a “leasing pool.”

Since 2010, growers with barn space have been allowed to lease quota at a rate established annually.

“It removes the whole aspect of a grower’s windfall gain from growth (of the total market),” Mitchell said. Likely, the former system of distributing new production to quota holders equally, led to a more-active-than-necessary marketplace for quota as growers simply sold what they couldn’t use.

“It is essentially seen as a windfall gain to that farmer who never produced the eggs,” Mitchell said. The new policy responds to Farm Products Council of Canada concerns about modernizing the industry’s legal framework, Mitchell said. Ontario egg farmers operate what Mitchell described as “truncated exchange” for quota transfers which helps limit growth in quota values. The electronic auction system awards bidders who come “closest to the equilibrium price” among offers from buyers and sellers. Traditional auctions award the highest bidder and support upward pressure on prices.

Before this year’s exchange, farmers bought and sold quota among one another directly. The new system was developed by Université Laval agricultural economist Maurice Doyon and a University of Victoria colleague, Daniel Rondeau.

The system followed three years of research and consultation with growers and allows quota transfers “in a more open and transparent” process, a statement by EFO general manager Harry Pelissero said at the time. It also publishes completed transfer prices and statistical data.

Summaries of each exchange for 2014 are published on EFO’s website. Without a central exchange and published prices it was hard to determine a market value for egg quota. Results of this year’s sales show prices consistently in the $295 to $296 range.

A Dec. 3 report on the fourth quota transfer session shows six successful transactions totalling 13,500 units of egg quota. Pullet quota sales totalled 48,038 units through six completed transactions at an equilibrium price of $23.80.

Following the first quarter exchange earlier this year, Pelissero said sales roughly matched the volume under the group’s previous, less formal transfer method.

It’s part of a sharp decline in quota transfers in each of the past five years and may confirm that policy changes have cut unnecessary transactions. In 2009, EFO data showed transfers of 338,000 units to 63 buyers for an average of 5,365 units per buyer. Quota transfers have declined in each year since then, Mitchell said.

In 2014, EFO data shows total transfers of 51,655 units to 21 buyers for an average of 2,459 units per buyer. Some of it may involve adjustments in quota buying activity as people reacted to introduction of the new exchange system itself. However, Mitchell also said the five-year-old system for leasing new production eliminates some extraneous trading in quota.

“We went from one method of allocation that was giving potential windfall gains and not serving the purpose of the quota system to one that is allowing the quota system to operate in an effective and efficient manner,” Mitchell said. BF