19 minute read
The Great American Egg Crisis
Since Putin came to power 15 years ago, the number of federal bureaucrats has jumped to 1.4 million, from 521,000, government data show. The Finance Ministry says the Russian government has a bloated budget. In July, Putin signed a decree ordering the Ministry of Interior Affairs, which has its own paramilitary force and oversees the police, to cut personnel by 10 percent, to no more than 1 million.
In an earlier round in late February the federal government, the Kremlin included, cut costs by 10 percent as well; Putin took a pay cut. Exactly how many Kremlin jobs will be lost this time hasn’t been decided, two people familiar with the matter say. Some of the savings may come from reduced wages and benefits, not outright layoffs.
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That Kremlin workers are facing a second round of purse tightening exposes the shakiness of the leadership’s assurances that the worst is over. Gross domestic product fell 4.6 percent in the second quarter from a year earlier, the largest drop since 2009. The contraction may accelerate to 6.3 percent in the July-September quarter, estimates Capital Economics in London, as low oil prices and sanctions over the conflict in Ukraine continue to batter the economy.
The austerity measures are a far cry from the excess that’s characterized most of Putin’s time in power. He more than doubled his own official salary, to 7.6 million rubles ($114,000) last year, as the nation celebrated the annexation of Crimea. The administration’s 1,715 staffers make an average of almost 3 million rubles a year, seven times the national average, according to the state statistics service. Peskov, Putin’s spokesman, declared 9.1 million rubles of income last year, more than his boss.
Given the inefficiencies of government in Russia, it’s hard to say if there are too many officials or not, says Andrey Klimenko, director of the Institute for Public Administration at the Higher School of Economics in Moscow. “In Russia, the state intervenes in everything,” he says. “That’s why we have such a huge number of bureaucrats.” —Ilya Arkhipov and Evgenia Pismennaya
The bottom line With elections a year away and the recession biting, Putin is cutting back on Russia’s 1.4 million federal bureaucrats.
Commodities Sick Chicks
This spring, the worst-ever case of bird flu hit the upper Midwest, wiping out about 11 percent of America’s egg-laying chickens. While farmers try to replenish their flocks, a nationwide egg shortage has driven prices to record highs and disrupted much of the food industry.
Affected birds
48,091,293
Number of affected birds by state
Average U.S. layers by month Cumulative total by week, 2015
Total U.S. egg production by month
Key
0 to 10k 10k to 100k 100k to 1m 1m or more results pending
Top egg- producing states: 1. Iowa 2. Ohio 3. Indiana 4. Pennsylvania 5. Texas
48.1 million birds
1/4 6/21
Toll on egg supply
32m
of the birds affected were listed as “layer chickens,” meaning they produced eggs
370m 9b
2015 2014 2014
2015
Prices soar
The disease mostly affected flocks at large industrial farms. Some cage-free eggs are now cheaper than regular ones.
From May to June, egg prices shot up almost 31 percent, the biggest month-to-month increase since at least 1980. As of July, a dozen Grade A eggs cost an average of $2.57, an all-time high. Rising costs have also affected the processed-egg market.
When a shortage of processed eggs hit in May and June, industrial users had to scramble to find alternate supplies and alter their business plans. Some saw their margins squeezed; others had to tweak or stop making egg-dependent products.
U.S. producer price index of processed, liquid, dried, or frozen eggs
Index of the average selling price received by U.S. producers, where 1982 = 100
An increase of 200%
from January to July
600
500
400
300
200
8/31/2010 100
7/31/2015
Processed egg products
Of the 242 million cases of eggs (360 large eggs per case) left in their shells produced in 2014, 54.9%
went to retail stores, 31.5%
were further processed, 9%
went to food-service companies, and 4.7%
were exported.
“The restaurateur that is buying a few cases of liquid eggs and pouring it into the skillets, he’ll have to buy more fresh eggs and crack them by hand.” —Tom Ditto, vice president for food service at Challenge Dairy
Refrigerated/ frozen egg
Egg whites Egg yolks Enzyme-modified
Whole eggs
Egg yolks Extended-shelf-life
Whole eggs
Whites
Yolks High-gel egg whites High-whip egg whites Salted
Egg whites
Egg yolks
Whole eggs Scrambled egg mix Sugared
Egg yolks
Whole eggs Whole eggs Whole eggs and yolks with corn syrup Whole eggs with citric acid Whole eggs with yolk added Cage-free egg products Kosher egg products Organic egg products
Liquid/frozen whole eggs
Whole eggs Whole eggs and yolks with corn syrup Whole eggs with citric acid with corn syrup with salt with sugar with yolk added Extended-shelf-life whole eggs
Refrigerated liquid/ frozen egg white
Egg white Salted egg white Extended-shelf-life egg white High-gel egg white High-whip egg white
Dried egg
Blends of whole egg and/or yolk with carbohydrates* Dried egg mix Egg yolk solids Enzyme-modified egg yolk solids Enzyme-modified whole egg solids Free-flowing
Egg yolk solids
Whole egg solids High-gel egg white solids High-whip egg white solids Instant egg white solids Pan-dried albumen Scrambled egg mix Spray-dried egg white solids Stabilized**
Egg yolk solids
Whole egg solids Whole egg solids Cage-free egg products Kosher egg products Organic egg products
Dried whole egg
Blends of whole egg and/or yolk with carbohydrates* Enzyme-modified whole egg solids Free-flowing whole egg solids (with free-flow agent added) Stabilized** whole egg solids Whole egg solids
Dried egg white
High-whip egg white solids Instant egg white solids Pan-dried albumen High-gel egg white
Dried yolk
Egg yolk solids Enzyme-modified egg yolk solids Free-flowing egg yolk solids (with free-flow agent added)
Value-added convenience products
Cooked scrambled eggs Cooked scrambled eggs with added whites Cook-in-bag scrambled eggs Crepes Deviled eggs Egg patties Filled omelets Fried eggs Hard-cooked egg rolls Hard-cooked
Chopped eggs
Whole eggs, pickled
Whole eggs, peeled
Whole eggs, unpeeled Heat and serve
Blintzes
French toast
Pancakes
Quiche
Waffles Plain omelets Quiche mix Scrambled egg mix
*sugar or corn syrup **glucose-free
Citric acid keeps egg products from turning green.
Fallout
Bakers
Egg suppliers to the country’s largest bakeries declared force majeure
and suspended deliveries.
A term used when breaking a contract under extraordinary circumstances Food producers
Cereal maker Post, which owns egg processor Michael Foods, said that 25%
of its egg volume was affected and that the flu outbreak will cost it $20m
this year. In May, Post said it would have to jump into the spot market to buy 165 million pounds of commercial eggs at higher prices.
Custard makers
Galloway, the biggest producer of fresh frozen custard mix in the U.S., has seen egg costs rise 300%.
In July, Rita’s began to replace its own custard with ice cream across its 600
stores. Shake Shack blames expensive eggs for its rising custard costs.
Restaurants
Food chain Panda Express has swapped corn for eggs in its fried rice dishes. Denny’s raised omelet prices and started marketing burgers. Red Robin pulled hard-boiled eggs from its salads and replaced them with cucumbers.
Winners
iStarting June 1, the U.S. began importing egg products from the Netherlands. iEgg-substitute maker
Hampton Creek
shipped powdered- egg substitute to General Mills. iFlocks owned by Mississippi-based egg producer Cal-Maine Foods were unscathed by the flu; the company’s stock jumped 60 percent from April to May.
Looking ahead
500
Iowa, the top U.S. egg producer, was hardest hit. Most of the hens that died supplied the egg processing industry: Experts estimate 30% of the birds in the country’s liquid-egg sector died.
sites where the U.S. Department of Agriculture will test for new cases of bird flu this fall. The agency is stockpiling vaccine.
August 24 — August 30, 2015 August 2 t 4 — August3 st 30, 2015 5
Things Are About to Get Ugly at Kraft
Warren Buffett and 3G Capital may put the food giant on a crash diet “They’ll do the best they can, but mostly they’ll cut costs” For decades, Kraft and other food behemoths offered convenience, comfort, and the promise of a modern lifestyle. But the compound annual growth rate of the packaged food industry in North America has been less than 1 percent for almost 10 years, with Big Food losing market share to smaller, healthier brands. Venerable Kraft Foods— whose Singles are a “processed cheese product,” and whose Cool Whip didn’t contain milk or cream until five years ago—has lost revenue for the past three years. “Now these big food brands are old-fashioned,” says Bob Goldin, chief executive officer at researcher Technomic. “Consumers don’t see them as relevant.”
But investors, well, that’s a different matter. Warren Buffett—who drinks Coke at breakfast and says he eats like a 6-year-old—teamed up with 3G Capital, the private equity firm founded by some of Brazil’s wealthiest men and known for its penny-pinching ways at Anheuser-Busch InBev and Burger King, to buy ketchup maker Heinz in 2013. In July, Heinz closed on its purchase of Kraft, with Buffett’s Berkshire Hathaway and 3G owning a 51percent stake. Kraft Heinz instantly became the third-largest food company in North America, with global sales of $29 billion last year. The good news is it’s composed of big, profitable brands. The bad: They have little potential to grow. “What can they do with these brands?” says Bloomberg Intelligence analyst Kenneth Shea. “They’ll do the best they can, but mostly they’ll cut costs.” While 3G executives haven’t said much about their plans— the firm said its managers were unavailable to comment for this story—they’ve made one big promise: They’ll cut $1.5 billion in annual costs from Kraft Heinz before 2018. The company will lose employees, whole levels of management, and maybe a few brands, too. That should help increase the profit margin and eventually boost the stock, making Buffett, 3G, and other investors richer. And it’s scaring the stuffing out of rival food companies concerned that if they don’t become more efficient, 3G
Wa arr ren Buff ffett tan na d 3G GCap a it tal almayputthe efoodgiant tonacrash hdie et “T “The h y’ y ll ldo othe ebest s the h y yca c n,butmostl ly ythey’llc cutcost s s s” ” For decades, Kraft and nd oth t er r foo o d be behemoth t s off ffer red conveni ience c , comfor o t, and th t e pr prom o is i e of f a mod o ern li ife f style. But th he co omp m ound d ann nua u l gr row wth h rate of the h package g d food o ind n ustry y in North h Am meric i a ha h s s been less th ht an n 1 pe erc r en nt t fo f r almo ost 10 ye ear rs, with Bi B g g Fo ood lo losing g mar a ket t share to sma m ller, he h alth hier br rands. Ve V nera able e Kraf ft t Food ds— whos se e Sing gle les are a “p processed d cheese e pr rp oduct,” and whose Co C ol Whi ip p didn n’t contai a n n milk or cream m unti t l fiv ve ye ears ago—ha h s lost revenue for the pas st th hree e ye y ar a s. “No N w these e big fo f od brands s ar re e ol o dd-fas shioned,” sa s ys Bob b Goldin, n ch hief f ex e ec cutive offi fficer at resea archer Technomi mic. “Consum mers s don’t t se ee th t em e as s relevant n . ”
But in nvest tors, wel e l, tha h t’ ’t s s a di ifferent t m ma atter. . Warren Buffett— —who o d drinks k Co C ke e at t br breakfa ast and d says he ea ats like a 66 year r-o old d—teamed up with 3G Capital l, the pr rivate equity t firm m fou und n ed d by som me of Br B az zil’s wealthi hies e t me en n and kn k ow wn fo or r it ts s pe p nnyy pinc ching ways at t Anheus u er r-Bus sch InBev v and Burger r King gn , , to buy ket tch c up mak a er Heinz z in 20 013. In Jul ly, Hei e nz n clo l sed on its s purchase of o Kraft t, with h Buff ffett’ t s Be B rksh hire and Buffett might do it for them. Kraft was the product of two decades of dealmaking. Philip Morris International bought General Foods in 1985 and succeeded in a hostile takeover of Kraft in 1988. The conglomerate, which called itself Kraft, bought Nabisco in 2000. Kraft’s size worked to its advantage. “For many, many years the food sector was unassailable. Shelf space in stores was limited; advertising was expensive. Little brands didn’t stand a chance,” says Alexia Howard, an analyst at Sanford C. Bernstein. “The industry was protected for so long it didn’t have to worry so much about costs.”
Ha H th haway y and 3G ow o ning a 51 p pe ercent st s ak ke. e Kraft t He H inz instantly yl becam a e the e thirdd larg ges e t fo ood o com mp pa any in n No orth Am A er rica, a with h glob ba al l sales s of f $29 bi ill l ion last year. r The e go oo od d news is it’s compo p sed of bi ig g, p pr rof o -f itab a le brands. The he bad d: Th hT e ey hav a e li l tt t le l pot o en nt tial to o grow. “W Wha h t t ca an n they e do o with these brand ds s? ?” says s Bloomberg g Inte ell ligen e ce an na aly yst s Ke K nn n et th h Sh S ea a. “T “They’ll l do o th he be b st they can, but t mos stl t y th the ey’l ll l cu c t costs.”
Wh W il le 3G 3 executives hav ve en n’t s said much ab bout t thei ir r plan na s s— — the firm sa s id its man a age ers w we ere er unavai ila l bl le e to com mment t for r th his s stor ry—th hey’v ve m made one e big i pr p om o ise: The ey’ ’ll l cut $1 1.5 billio on n in n ann nual co c st ts fr rom Kra aft Hei in nz z be before e 201 0 8. 8 The e com mpany n wil ll l lo os se e employees, , whole lev vels of man na ag geme m nt, an nd d ma m yb be e a a fe ew brands d , to oo o. That sho h uld d he h lp inc n rease e th ht e e profi fit margin and d event n uall l y y boos st the e stoc co k k, , ma aking Buff ffett, 3G, , and oth t er investo or rs s richer r. An A d it’s s scaring g the e stu uffin ffi g out t of f riv val foo od d co omp pa anies s conc n er rned d th t at t if i they y do d n’t t beco ome more e effi fficient t, 3G G
An Appetite for Deals An App p et tite e for Deals
Value of announced and completed deals involving Value of of announ u ced an and c dcomp om let le ed dea als l involving packaged foods companies in North America pac a kag k ed d foods com mpan nies es in No orth rt America
$80b $80b
Private equity is Private equity y is s helping fuel helping fuel M&A activity M&A A ac ctiv ivity y
$40b $40b
0 an nd d Buffett t mig i ht ht do it i for th hem m.
Kraft was s the e prod o uct of f two o decades of dealma akin ng. g Philip p Mo M rr ris i In ntern nationa n l l boug ght General a Foo o ds s in n 198 85 5 and d suc cce eed ded d in n a a hostile take eover of Kraft t in n 198 88. 8 The h con o glom o erat te, , which calle ed its sel lf f Kraft, bo ough g t Na N bi isco o in n 2000. 0 Kraft’s size e wo k rked to o its ad a va v nta age e. . “For many, y many year rs the e fo f od d sector o was una n ss s a aila abl le. e She h lf l spa p ce e in store r s was s limited; ad dver erti ising was ex xpensive. Lit ttle br ran ands did dn’ n t t st s and a a ch hance,” says Ale exia a How o ard, d an an a alyst t at a Sanford d C. Be ernstein. “The in ndustry wa w s protected fo or r so so long it did dn’ n t t have to wo orry so much h about u cos o ts.”
2.5k
A healthy new picture A h A A eal althy new picture re
for Fujifilm 21 for o Fujifilm lm 21
Briefs: With pay up, Bri iefs e : W Wit ith pay up, p Wal-Mart’s profit drops; Wal-Ma -M rt’s p profit drops; s
cash for BuzzFeed 23cashf h for r BuzzFeed d 23
Then all sorts of chains, and Amazon Then all sorts of chains, and Amaz a on .com, began to sell groceries, some even .com m, be egan n to sel ll groc o er ries, s some even n offering their own brands. Social media offering g their o own br b ands. So ocial media and word of mouth started replacing and word d of mouth started d repl lacing advertising. And more shoppers have adv vertis i ing. g And mor o e shoppers hav ve e been seeking foods that are fresh, be b en seeking foods that ar re fresh, , free from artificial ingredients, and fr f ee fro om m artific cial l ingredient n s, s and d have a transparent supply chain. ha h ve a transparent n sup ppl p y y chain. n In 2012, Kraft split in two: In n 2012, Kraft split t in n t two: The snack food and candy The snack food d and candy y brands, which had a bigger br b ands, wh w ich h h had a bigg g er presence outside the U.S. p presence out u side e the U.S. and were expected to an a d d were expected to have higher growth, ha h ve higher grow wth, became Mondelēz became Mondelēz International. International. . Everything else— Everyt y hing n else— including seven including seve en n billion-dollar bi b ll lion-dolla ar brands such as br b ands d such h as a Oscar Mayer and Oscar Mayer r and d Velveeta—stayed Ve V lv l eeta— —sta ayed with Kraft. w with Kraft. The strippedTh T e stripped ddown company d down w com o pany y tried to adapt. tr t ied d to o adapt p . “It’s clear that “I “ t’s s cl lc ear that our world has ou o r r wo orld d has changed and our ch chan ange ed and our consumers have co onsumers ha h ve e changed, and changed, , and our company our r comp pany y has not changed h has no n t t changed d enough,” John enough h,” , Joh hn Cahill, Kraft’s Cahill, Kr K aft’s s then-CEO, said then-CEO, , said in February 2015, in Febru uar a y 2015 1 , two months after two o mont n hs after e his appointment. his appo oin i tm ment. Kraft soon prom-Kr K aft so s on promised to remove artifiised d to remove artificial ingredients from its c cial ingredients fro om its iconic Macaroni & Cheese. i iconic Macar a oni & Chee e se s . But changing consumers’ Bu B t t changing consumers’ perceptions of brands that perceptions of o brand n s th ht at have been around so long is have been arou und dn so o long gn is hard, says Billy Roberts, a food ha h rd, says y Billy y Rober e ts st , a fo f od d analyst at researcher Mintel Group. an nal a yst at a res searc rcher Mint tn el Gro oup u .
Cahill also talked about making Kraft Cahi h ll l also ta alked about t mak kin ng g Kraft more efficient and said he’d provide more effic cie i nt n and said he h ’d d provide details in a few months. But he never details s in i a few w months. But t he never got the chance, because Buffett decided got th he e chance, be eb caus u e e Buffett decid d d ed to join forces with 3G, who would to o joi in forces e with h 3G, wh who would d look deeper and move faster. Says look dee e per an and mo m ve faster. Say ys s Technomic’s Goldin about the private Tech hnomic c’s Go G ldin n about the h pri ivate t equity firm: “They would have you equity t firm: “T They would d have you
