IN THE NEWS

💼 Unemployment hits 53-year low (CNBC) 

💸 Americans Tap 401(k) Savings (WSJ) 

MAIN STORY: THE EGG CRISIS, EXPLAINED

Humble beginnings

Glen Hickman’s family business started in 1944, with his grandmother managing a modest 500 backyard chickens and selling their eggs to neighbors.

Now, he’s a third-generation farmer overseeing 10 million laying hens, marketing eggs from Wyoming to Hawaii and much of the southwest.

Like many of his peers, he’s flying through the eye of an avian flu hurricane that’s killing millions of birds, spawning a shortage of a basic household grocery item: eggs.

Eggs are, in many ways, the household staple equivalent of gasoline. We may use them daily in one form or another, load up a few times a month, and we likely have an intuitive feel for what both should cost.

Off the top of their head, most people could probably tell you about what a gallon of gas or a carton of eggs go for.

So when prices for these regularly-purchased necessities jump, it can be a visceral reminder of inflation’s painful bite.

In just the past year, egg prices are up over 60%.

Let’s discuss.

What to know

Hickman explains that egg production in the U.S. is a concentrated business, with the top 20 producers generating roughly 80% of output.

The egg industry is “by and large price takers,” he says. Market prices for corn and soy, for example, necessary for feeding chickens, are outside farmers’ control.

Hickman highlights that 2019-2021 were three of the worst years ever for returns in the egg industry due to rising input costs, pushing many farmers to downsize or exit the business altogether.

The Ukraine war has only worsened this, “adding fuel to a fire that already existed. Our grain costs have just exploded, and…between labor, utilities — everything in our environment has just gone up exponentially in some cases.”

Interestingly, Hickman provides some context for grain inputs: “One laying hen will eat one bushel of corn per year. That one laying hen will also produce enough eggs for one person. So when a bushel of corn went up 2.5x, that’s gotta be reflected down the rest of the food chain.”

Add to this period of negative returns a bird flu of historic proportions, and many farmers are left in dire straits, rendering higher egg prices the only possible short-term remedy.

Avian flu

According to Hickman, “the spread of infection is so fast and deadly that one day you’ll have ten sick chickens in a barn. The next day you’ll have a hundred. (And) the next day you’ll have a thousand.”

When an outbreak is identified, the federal government mandates that the entire flock is euthanized. Consequently, 15% of the nation’s laying flock was lost last year.

Like Covid, once the virus is loose, it’s hard to contain, especially as it mutates. While there’s talk of an avian flu vaccine, Hickman suggests it’s likely a few years away.

Although the government does provide stipends for depopulation and disinfecting costs, this doesn’t account for the value of lost eggs, nor does it provide funds for farmers to replace lost chickens. The disaster, then, has been quite devastating to many operations.

Efficiency gains

Fortunately, farmers have proven excellent at doing more with less.

Since 1960, Hickman argues that an acre of corn farming, as an input into egg production, now yields about four times as many eggs as it used to, and almost all of those efficiency gains have been reflected in market prices.

“For the American consumer, up until recently, we were selling eggs for virtually the same price as we did in 1960.”

In other words, the recent price surge is truly an anomaly, as farmers have increasingly generated more and more food with fewer resources.

Egg supply/demand

Egg demand is very inelastic, but there has been some consumer pullback.

Hickman notes that large families have been scaling back egg purchases slightly, going from perhaps two dozen a week to 18 eggs, hoping prices will drop soon. It’s the same for commercial bakeries that may try cutting down the number of eggs used in batches.

These changes, however, are marginal.

And he explains further that farmers like himself are unlikely to add, say, another million birds to their flock because of a temporary shortage.

The emphasis is simply on repopulating within existing capacities instead of investing capital dramatically in new cages, workers, land, etc.

Takeaways

While the picture above may feel a bit gloomy, flocks are repopulating, and demand has slowed as we drift further from the holiday baking season, so egg prices have likely peaked.

Hickman provides fascinating insights into an industry that most take for granted. That is, until prices at the grocery store suddenly jump.

Evidently, rising prices have not been isolated to the egg industry, but the space does offer an example of how complex and interrelated supply chains can be.

Overlapping distortions across many industries, like rising grain prices from the war in Ukraine and bird flu, have rippled through into higher consumer prices, pushing up inflation indexes in the past year or so.

Dive deeper

To hear Hickman’s full thoughts on the egg market, listen to this Bloomberg podcast.