Egg prices are way up, it probably isn't a conspiracy
The Guardian gets it wrong (probably)
These past months have been unusual– my friends and neighbours are interested in my work for the first time, with one question on their minds, “Why are egg prices suddenly sky-high?”. Many are pointing to bird flu but last week the Guardian suggested a darker explanation: corporate greed. Could that really explain the spike?
The Guardian reports that “major egg companies may be using avian flu to hike US prices” based on a report from an environmental group. Understanding just why egg prices have soared in the past year is the first step to bringing them back down, so getting the diagnosis right really matters. Here are the Guardian’s key claims and how accurately they reflect the dynamics we are seeing in the egg industry:
Supply is only somewhat down, so why are prices exploding?
The Guardian article correctly notes that egg supply has “only” decreased by around 9%, yet prices are up over 100%. You might naturally expect that a 9% drop in supply would lead to around a 9% increase in price, and so the 10x higher prices increase seems suspicious. Here’s the Guardian’s graph, showing egg price increases vs egg inventory changes:
But supply and prices are not generally linearly linked to each other, not without factoring in demand. If prices go up, demand tends to fall, and vice versa. Economists call this relationship between prices and demand elasticity. If demand falls quickly in response to rising prices (“high elasticity”), we might roughly expect egg prices to reach an equilibrium where falling supply leads to rising prices, which leads to falling demand, which then leads to falling prices, and so the overall price doesn’t change all that much with supply shocks like bird flu. This is true for goods that are easily substituted, for example if the price of butter goes up, consumers may respond by buying more margarine, reducing the demand for butter and limiting the price increase.
But eggs are generally not easily substituted for other goods. If you need eggs for breakfast and the price is up 20%, well, you either buy the eggs at the higher price or totally change your breakfast routine, there just isn’t an easy substitute. In other words, egg prices are highly inelastic. Gasoline prices work this way too– if the price of gas doubles, you might not buy very much less than before as you have no alternative for your work commute. This lack of easy substitution means that rising prices have pretty minimal impact on demand, and so even a modest drop in supply can lead to substantial price increases before consumers finally do respond by reducing demand and stabilising prices.
Here’s how that might apply to a 9% drop in the egg supply. A 9% drop in supply will roughly mean that eggs have gotten 9% more expensive to produce (as ~9% more chickens were required to produce those eggs), so let’s say the price goes up 9% to keep producer profits steady. But, as we discussed, egg prices are inelastic: people will just keep buying them at 9% higher prices, they don’t want to substitute them with other food. Now we have a practical problem: consumers cannot keep buying as many eggs as before, there are 9% fewer eggs out there, so someone has to eat less.
So the average consumer has to eat 9% fewer eggs. If the 9% price increase wasn’t enough to make consumers eat 9% fewer eggs, the price will need to go up, and it won’t stop until it’s high enough for consumers to reduce their consumption by 9%. If that won’t happen until eggs are 100% more expensive, then that’s how high the prices will go. The high prices will benefit the industry, of course, but this isn’t a function of a corporate conspiracy, it's a function of how much Americans like eggs, and how much lower the old prices were than Americans were willing to pay. Eventually, producers will respond to the high prices by hatching more laying hens, but this takes some time, so we will see higher prices for a while, especially if this increase in hens is offset by further bird flu losses.
So one way to look at a 9% drop in supply leading to a 100% increase in price is to see a conspiracy, but the more likely interpretation is that Americans are just willing to keep buying eggs, even at high prices, and so relatively small supply shocks will generate big price surges.
One company saw record profits in 2023: is this evidence for price gouging?
The Guardian article notes that America’s largest egg producer, Cal-Maine, saw record profits in 2023 despite not losing any chickens in that year to bird flu. The charge here is two-fold:
If industry profits are increasing, then prices are increasing more than the industry’s costs are i.e. if the price increase was only needed to cover cost increases, profits would be steady
If a company does not see its own supply hit by bird flu, it should not increase its prices even if other companies do
The logic behind point 1) is clear but the underlying data can mislead us: it is correct to say that if industry profits grow when they face supply shocks, they may be charging more than they “need to”. But the data here are just for one company, Cal Maine, which did not face flock losses in 2023. If the entire industry saw growing profits during bird flu, we might have cause for concern, but we cannot extrapolate the entire industry from one company. In fact, it makes sense that this one company would see rising profits if egg prices are rising without their own costs going up, since they avoided bird flu that year. But that leads us to the 2nd point: if costs are going up nationally due to bird flu, can a company charge more for their eggs even if their own costs have not been affected?
Companies raising their own prices when national prices are going up, but their own costs are not increasing, is a cause of constant controversy. Consumers and politicians point to examples such as expensive hand sanitiser at the start of COVID to Uber charging surge prices following terror attacks on public transport. The extent to which you think this is “fair” depends on how much you believe in the efficiency of markets: a pro-market economist would argue that the surge in egg prices will lead to a surge in egg supply (farmers keeping more chickens) and so prices will stabilize over time (just as more companies started making hand sanitiser early in COVID, or more Uber drivers get into their cars as prices surge).
All I’ll note on this is that this phenomenon works in both directions: corporations will indeed charge more when national prices go up but they will also charge less when national prices drop, even if their own costs have gone up. If we look at the Guardian’s price graph again, we see a steep drop-off in prices in early 2023: as supply increases again, companies will be forced to drop their prices, regardless of their own costs, just as they have in the past.
The Guardian’s graph again with my sassy annotation in orange
5 companies produce half of the USA’s eggs: does this give them monopoly power?
The Guardian article argues that the US egg industry is unusually concentrated, leading to effective monopoly power for producers, allowing them to dictate prices. So is the US egg industry unusually concentrated? The Guardian notes that the top 5 companies produce 46% of American eggs. Here’s the % of revenue controlled by the top 5 companies in some other US industries:
Beef: 90%
Chicken meat: 75%
Soft drinks: 90%
Airlines: 85%
Telecoms: 90%
Grocery retail: 50%
Each of those industries seems pretty price-competitive, despite all being much more concentrated than the egg industry. In fact, the grocery retail industry is just as concentrated as the egg industry, and it’s the retailers who are buying eggs from producers: if egg producers are abusing monopoly power to charge higher prices, we should expect grocery retailers to use that same power to demand lower prices. It doesn’t seem clear that concentration is a problematic feature of the US egg industry.
Retailers use a shared egg price information system, which essentially leads to price collusion
The Guardian article notes that most retailers use the same egg price research software to inform their pricing, which can then in turn lead to feedback loops where egg companies increase prices, this is reflected in the software, and so retailers offer higher prices to producers, so producers ask for even more, and so on. This seems very unlikely given the relative lack of concentration in the egg industry. Let’s say the largest company represents 20% of supply and eggs are currently $5/dozen. That company decides to rig the pricing system by increasing their prices to $6/dozen: this $1 increase for 20% of eggs will cause the average price to rise to $5.20– but this company is charging $6! Any retailer will see this producer as over-charging and refuse to buy at $6. The industry just isn’t sufficiently concentrated for producers to have this kind of price-setting power.
Bird flu really is causing high prices: controlling it is the only path to lower prices
The corporate greed narrative doesn’t do enough to explain the price surges we are seeing in recent years. The much clearer pattern is:
Bird flu is directly killing laying hens, and leading to large-scale culling of flocks
This reduces the number of eggs for sale
Reduced supply leads to increased prices
American consumers do not substitute eggs for other things and so they keep buying, even at higher prices
Prices continue to rise until they are finally high enough to cause some reduction in demand
Some companies will avoid bird flu and make unusually high profits due to the high prices, while others will be badly hit by bird flu and make unusually low profits, or losses, in spite of the high prices
Producers respond to the higher prices by hatching more layer hens, but they take 3 weeks to hatch and 6 months to grow to laying-age, so we will see higher prices for a while
For as long as bird flu causes unpredictable drops in supply, we can expect this to continue
“Corporate greed” should be constant but prices go up during epidemics and down again afterwards
Understanding these dynamics and pointing the finger squarely at bird flu is important because an accurate diagnosis leads to an accurate prescription. Only large-scale vaccination of the US laying flock will get bird flu under control and bring about the low egg prices that consumers want.