Why egg prices are a shell game
Posted
Sep 25 2008, 09:35 AM
by
Anthony Mirhaydari
Rating:
The rising price of food is supposedly the result of growing global demand. But, at least in the case of eggs, it looks like producers are conspiring to jack up prices.
Egg prices were up nearly 30% last year, while overall food prices rose just 4%, according to the U.S. Department of Agriculture. This year they're forecast to jump another 14% higher, compared to 5% to 6% for food overall.
Such a rise isn’t possible without big-time shifts in supply and demand. I don’t know about you, but I haven’t drastically increased my need for eggs in the morning. In fact, egg consumption is actually on the decline.
Sure, part of the cause is more expensive feed grain resulting from biofuel production and growing demand from the developing world. But it appears that the root cause is more nefarious. An industry trade group, representing 250 of the largest egg producers, organized big export shipments at below U.S. market prices and reduced flock sizes -- all in an effort to suppress the number of eggs in our supermarkets and raise prices at a time of falling demand.
The egg cartel, known as United Egg Producers, was quite pleased with their efforts. The group's executive director, Gene Gregory, a life-long egg man, noted that while these export orders only amounted to less than 2% of total product, "it is amazing how one or two percent can have an effect on the rest of your domestic price." The group is currently readying another shipment for export.
United Egg is confident because it believes its actions are protected from antitrust law by the 1922 Capper-Volstead Act. Signed into law by President Harding, it was originally conceived as a response to a depression in agricultural prices following World War I. Capper-Volstead allows farmers to group into voluntary cooperative associations for the purposes of production and marketing. As outlined in this academic paper, the Act was designed to protect small farmers from big "agribusiness" entities.
To protect consumers, the Act stipulates that the Secretary of Agriculture can step in if he has "reason to believe that any such association monopolizes or restrains trade in interstate or foreign commerce to such an extent that the price of any agricultural product is unduly enhanced." If egg prices continue to climb, or remain elevated in light of reduced egg consumption, I wouldn’t be surprised to see some political pressure leveraged on the next Administration.
It could come even sooner if the United Egg Producers continues to push for supply reducing measures that require 30% larger cages for egg hens. With larger cages, hens are a bit more comfortable, but producers are forced to maintain fewer birds in a given amount of space. According to the Wall Street Journal, farmers that raised flock sizes risked being removed from the organization's certification program.
This won't be good news for Cal-Maine Foods, the big publically-traded egg producer that controls 13% of the retail egg market. Its share price has gone from $5 to nearly $50 over the last four years. Shares pulled back to around $40 lately, but if antitrust populist fervor gets directed at the naughty egg producers, it could go much lower as retail egg prices fall. Be warned, however, that there is already massive short interest on the egg producer, and with the SEC hunting down short sellers on Wall Street, an epic short squeeze could catapult shares higher over the near-term.
(Disclosure: I don’t control a position in any of the companies mentioned)
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