A collapsed egg market and a contract loophole with their integrator have some egg producers in northwest Arkansas and east Oklahoma worried about survival.
In November 2014, Arkansas Egg Co. of Summers sold approximately 35 egg-producing contracts with local farmers to privately owned Vital Farms of Austin, Texas. In the past few weeks, Vital Farms has informed some of those contracted egg producers that the company would “turn out” their birds — that is, Vital Farms would collect and kill the birds to prevent their eggs from reaching the oversaturated market. Several farmers, almost all of whom requested anonymity because their contracts are still active with Vital Farms, told Arkansas Business that their birds or those of fellow producers have already been turned out.
The farmers are those whose integrator contracts with Arkansas Egg had been purchased by Vital Farms. As integrator Vital Farms owns the birds and provides feed, while the farmers are responsible for everything else.
For egg producers who have tens if not hundreds of thousands of dollars invested in land, chicken houses and accessories, losing eggs to sell could amount to financial ruin.
Vital Farms was founded in 2007. It was named to the Inc. 5000 list of fastest-growing private companies with 2014 revenue of $28.7 million and a three-year growth rate of 496 percent.
According to producers who spoke to Arkansas Business, Vital Farms pays between 50 and 88 cents per dozen eggs; a producer with 5,000 chickens could lose the potential income of 4,000 eggs a day for weeks if not months, depending on how long each turned out flock had remaining in its laying life.
“It’s a bad deal for the farmers, I’m telling you,” said a northwest Arkansas farmer. “I don’t know how we can get it stopped or how we can get it fixed, but it’s not right. It’ll break people. There will be people who lose their farms over this.”
‘Tough Choices’
As recently as a year ago, the egg market was in fine fettle both for cage-produced eggs and the specialty egg market that includes cage-free, free-range and pasture-raised. But that was a year ago.
This summer, cage-egg wholesale prices — the most popular eggs on the market — fell to 55 cents per dozen, the lowest in 10 years. Specialty eggs, which generally sell from anywhere between $4 and $8 a dozen, couldn’t compete.
The glut was the result of prices that stayed high after the Avian Influenza scare of a year ago and caused many farmers to up their egg production to capitalize on the high prices. But when all those eggs hit the market, prices plummeted.
“I would say it’s the worst market since the late ‘90s; it’s hard to say if it is going to set up as one of the worst markets ever,” said Michael Cox, the president of Arkansas Egg. “Looking at the next 12 months it’s easy to see how things aren’t going to change much.”
Cox said he likes the long-term prospects for specialty eggs, but there will be short-term pain while the market remains flooded with cheap generic eggs. Vital Farms, with thousands of pricey eggs struggling in the saturated cheap market, decided to reduce production until the market rebounded.
COO and President Russell Diez-Canseco said Vital Farms had “tough choices” to make to keep the company sustainable long-term. Diez-Canseco said the company was using a clause in the original Arkansas Egg contracts that he said allowed Vital Farms to turn out birds when production was no longer profitable.
Diez-Canseco said Vital Farms would pay farmers 1 cent per day per turned-out bird for the rest of 2016. The 1-cent pay is the same as “pullet pay,” the amount Vital Farms pays farmers for birds before they start laying eggs, usually from 15 weeks to 25 weeks of age.
“We’ve never been in a situation before where we had more eggs than we needed,” Diez-Canseco said. “When you have too many eggs in a market like this, there’s not much you can do with them. So we’ve taken many steps over the last year to bring that supply more in line with our demand.
“As that problem has continued, we have had to take steps again — completely within the terms of our agreements with all of our growers — to bring that supply down. That’s what we did in this case.”
Cox wrote the original contracts and said the profitability clause was not meant to be used the way Vital Farms was using it, although Cox stopped short of directly criticizing the interpretation. Arkansas Egg still has a buy-sell contract for 30,000 chickens with Vital Farms, meaning Arkansas Egg owns and controls the entire laying process until selling the eggs,.
Cox said the clause was originally meant as a corrective measure for farmers whose birds were not producing enough eggs to pay for themselves and their feed. It was not meant as a market correction tool, Cox said.
“As the authors, I can tell you our intent was more related to production,” Cox said. “If they were underperforming with their egg output is the intent of that clause. We interpret it to be strictly a measure of production and not a measure of the company’s profitability.”
‘Severance Pay’
Producers whose birds will and have been turned out said they had the same understanding of the clause when they signed with Arkansas Egg. They are reluctant to voice those opinions publicly because most still have flocks under contracts with Vital Farms, and the company has told them it won’t restock birds until profitable market conditions return.
“The hens are doing what they’re supposed to,” said a farmer in east Oklahoma near Siloam Springs. “That is what the clause is there in for. They’re twisting that clause because they’re losing money.”
Diez-Canseco said Vital Farms doesn’t believe the current market conditions will continue long-term. He said he wished the pullet pay Vital Farms is offering could be more.
“I could make choices that would be more comfortable now, but maybe we wouldn’t be in position 2-3 years from now to continue delivering on our commitments,” Diez-Canseco said. “I wish these choices were easier. I wish we didn’t have this kind of situation, but the reassurance I would give those growers is, as painful as this is, we’re being proactive about making sure this is sustainable for all of our stakeholders.”
One farmer who didn’t ask for anonymity said the pullet pay Vital Farms was offering amounted to “severance pay.” Mitchell Yancey said he invested $200,000 for two pasture-raised chicken houses that can’t easily be repurposed for other uses, and the pullet pay he will receive for 5,000 turned-out chickens wouldn’t even pay his insurance.
“They’re still selling their eggs at the same price,” said Yancey, whose farm is at Westville, Oklahoma. “They grew at 100 percent for two years in a row and they outgrew their market. Now the producers have to pay for that.”
Diez-Canseco said Vital Farms’ pullet pay was the only instance he knew of where a company was paying for absent chickens. But Cox said Arkansas Egg was doing even better by the owners of organic chicken houses that the company had depopulated because the organic egg market was depressed.
Among the farmers Arkansas Egg is paying are Derek and Tyler Amoth of Gentry, who are listed on the “Meet Our Farmers” page of Vital Farms’ website. Cox said Arkansas Egg is paying what the depopulated chickens had been expected to produce if they had laid eggs.
Other producers said the Amoths were among those whose chickens would be turned out by Vital Farms; Derek Amoth declined comment when contacted.
“We chose to make good on what their income would have been,” Cox said. “It’s the right thing to do for one. A year ago, when they could have sold their eggs for 10 times the money I was paying them, they continued to sell their eggs to me. It’s a two-way street. When the ball was in their court, they honored their end of it. When the ball’s in my court I’m going to honor my end of it.”
One producer said he heard rumors that a second round of turnouts was in the works, but Diez-Canseco said the only contracts that allowed such action were the former Arkansas Egg ones. And those contracts, he said, are a “subset” of the company’s integrator contracts, which themselves were a minority of Vital Farms’ total contracts. He said Vital Farms couldn’t take more birds out of houses without breaking a contract.
“I don’t know who you’re talking to, but some of our integrator farmers have multiple flocks with multiple contracts,” Diez-Canseco said. “We’ve gone in and turned out one flock and left the other. By the way, that is my evidence that we haven’t broken any of our contractual commitments. If we just wanted to leave town, we would have shut them all off.”