Egg Prices: Laying Blame on Retailers

Gazing across a sea of 30,000 White Leghorn chickens, Jerry Armstrong sees only hungry mouths to feed. Since the farm price for eggs dropped to a 22-year low last month, it’s become difficult for the Valley Center farmer to feed these hens and the 970,000 others he has in sheds scattered around San Diego County, let alone pay his workers and keep the utilities turned on.

“We’ve had a very low market,” Armstrong says. “Even Easter was barely break-even. But with this many chickens, you can’t just jump out of the egg business.”

A glut of eggs in the Midwest is the culprit for the rock-bottom prices plaguing farmers such as Armstrong. The oversupply also has led to a 22-cent-a-dozen nationwide drop in the retail price of eggs this quarter.

But here in California, prices have defied the laws of economics, sticking close to the $2 mark, rather than sliding as the supply has surged. Retailers in California charge an average of $1.95 per carton, twice that of most other regions of the country, according to data from Information Resources Inc.

And in Los Angeles, egg prices run even higher. At Ralphs and Albertsons supermarkets, for instance, large eggs cost $1.99 a dozen this week. Vons has eggs on a buy-one-get-one-free special, but the regular price is $2.19.

The cost of producing eggs is higher in California, owing to higher land, feed and other costs, but these extra costs have little to do with the premium prices on supermarket shelves.

Farmers here receive about the same price for their eggs as farmers in the Midwest, an average of 27.4 cents per dozen last month, according to UC Riverside poultry specialist Don Bell. Although egg processors don’t talk about their margins, industry analysts say they add 25 cents or more on top of the farmer’s price for grading, packing and distributing the eggs.

It’s the supermarkets that take the lion’s share of the retail price. Retailers know that Californians, used to paying more for just about everything, won’t balk at paying an extra dollar each week or two for a staple like eggs, analysts say.

“The retailer is taking more for inventorying eggs than the producer is for producing them,” says Lee Schrader, professor emeritus of agricultural economics at Purdue University. “They don’t do anything but punch the cash register, and for that they get more than a buck a dozen.”

Supermarket executives in California say they strive to be “competitively priced” and offer regular discounts to loyalty card customers. They acknowledge that their profit margin on eggs is high but defend it by saying it allows them to offer discounts elsewhere in the store. Besides, they say, high prices don’t appear to bother shoppers--consumption in California actually increased one egg per person last year--so why not charge what the market will bear?

“We just want to keep the spreads that will keep us in business,” says Jack Brown, chief executive of Stater Bros. Markets.

Supermarkets found out just how much consumers are willing to pay for eggs in 1983 when an avian flu outbreak killed off a good portion of the state’s flocks. Egg prices soared, and when hen stocks were restored, prices dropped--that is, everywhere but in California, because the demand for eggs stayed strong here despite the high prices.

California consumers do have lower-price options for buying eggs: Trader Joe’s and many independent grocers can charge as little as $1.29 per dozen. Costco this week is selling a carton of 18 eggs for $1.23. But once shoppers make a trip to one of the big supermarkets, most aren’t likely to make a special trip to another store just for one item.

While the major supermarket chains are doubling and even tripling their profits, egg producers and distributors are barely getting by. Few will talk about their financial troubles, at least on the record. But almost all of the state’s 80 producers, clustered mainly in San Bernardino, San Diego and Riverside counties, are at this point unable to pay their bills.

Farmers, Bell says, need to get 48 cents a dozen just to break even. Last year they received an average of 44 cents, and in recent weeks the farm price dropped as low as 26 cents before rebounding this week to about 38 cents per dozen.

Based on the $1.99 retail price charged by Ralphs, that would mean a markup of $1.36 a dozen in Southern California, taking into account the 25 cents taken by processors. By contrast, the average retail markup nationwide in the first quarter of this year was 35 cents a dozen, according to U.S. Department of Agriculture data.

Southern California’s high egg prices in recent years have led to allegations of price fixing. A couple of San Diego shoppers took the region’s biggest supermarkets to court last year, claiming that the Southland’s higher prices were a result of price monitoring.

Although a jury found the three chains not guilty of conspiring to keep prices high, economists say that doesn’t mean that they don’t try to price within a few cents of one another.

Supermarket consolidation has also played a part in egg farmers’ woes. As regional chains have been acquired by big national companies, experts say, they now expect producers in California to match the prices of lower-cost producers in the Midwest.

They’ve also begun turning to huge processors that can supply eggs to more of their stores, feeding the wave of consolidation already happening in the industry. Two of the Midwest’s largest agribusinesses, Moark Productions, a Missouri egg supplier, and grain and dairy giant Land O’ Lakes of Minnesota, teamed up in February to purchase Southern California’s largest egg processor, Norco Ranch, from founder Harry Eisen.

In return for long-term contracts from big suppliers, processors have been asked to pay millions of dollars in upfront fees. In Norco’s case, those fees amounted to $4.5 million in one year, according to court documents.

Though a big processor like Norco can simply raise its wholesale price to maintain its margin, egg farmers such as Armstrong don’t have that luxury. With more eggs than the market can handle, Armstrong says, processors would just gather their eggs elsewhere if farmers tried to raise their price.

The egg business hasn’t always been this grim. Four years ago, when farm prices were averaging 69 cents per dozen, egg producers were making a tidy profit.

But as grain prices have plunged in the last couple of years, farmers in Ohio and Iowa who had never raised chickens before have begun opening their own egg farms as an outlet for their grain.

Production in those states has swelled by millions of birds. Now that the market is glutted, farmers in those states have begun to pare back expansion and in some cases sell off some of their birds as meat.

Meanwhile, production in California has continued its decade-long decline, sliding to 23.8 million birds in March from 25.2 million last year as farmers have exited the business or trimmed their flocks.

Once the country’s largest egg producer, California now ranks third below Ohio and Iowa, and it must import about 64 million dozen eggs to feed its 34 million citizens.

Although production in the Midwest is expected to slow down this year--the only true remedy for depressed prices--farmers think it could be another year or two before their prices begin to rebound.

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Egg Drop

The average annual price paid to farmers for a dozen eggs has been falling since 1996.

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1999: 44.1 cents

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Source: U.S. Department of Agriculture * WHOLESALE PRICES STEADY

Flat reading for May surprises analysts. C2