Eggflation - how the price of eggs changes and what determines them

At the turn of 2022 and 2023 in the United States, the price of eggs increased dramatically. The deadline appeared in the media eggflation, which is a combination of two English words egg (egg) and inflation (inflation).

Easter is a time to get together with family. During these holidays, the average Pole eats about 15 eggs. On the other hand, a statistical Pole consumes 150 eggs throughout the year. Due to the fact that during the holidays as much as 10% of the annual consumption of this product is consumed, let's explain what it is eggflation.

How big was the increase in egg prices?

To say that egg prices have increased significantly in the United States in 2022 is an understatement. In November 2021, the price of eggs was around 85 cents for 12. At the turn of 2022 and 2023, the price of this product increased above $5 for 12 pieces. In some states, the price of eggs has gone up to $7 for 12. As you can see in the chart below, egg prices have been “normal” for many months, but they started to increase from December 2021. The surge came with Russia's invasion of Ukraine, which disrupted some supply chains and pushed up product prices around the world.

source: TradingEconomics.com

The sharp rise in egg prices has sparked a frenzy on social media. Like mushrooms after the rain, memes about this phenomenon began to emerge.

What were the causes of this phenomenon?

For years, eggs were very cheap in the United States. This was due to a well-developed sector. Large production volumes allowed to reduce unit production costs. The market has also started to change. More and more eggs are being sold from cage-free farms.

Despite technological progress, an egg cannot be produced without a hen. Therefore, if the hen population decreases, the supply of eggs will decrease in the short term. Simply rebuilding the population of laying hens may take some time. While the burning of one farm may not change the structure of the market, the situation will be much worse in the event of a plague.

Bird flu occurs every few years and decimates the chicken population. In 2022, bird flu led to the death of over 44 million chickens (43,3 million laying hens and 1 million small hens). The 2022 bird flu was much more widespread than the 2015 one. Less supply led to higher prices because the demand for eggs is not perfectly elastic. Of course, as the population recovers, the supply of eggs will recover.

source: Cal-Maine

Another factor contributing to the increase in egg prices was the increase in costs related to egg production (feeding hens, heating farms, etc.). However, the impact of production costs was not as significant. Between Q2022 2023 FY and Q29,5 XNUMX FY, feeding costs increased by approximately XNUMX%.

source: Cal-Maine

The price has increased particularly sharply corn and variety. This, in turn, translates into a higher price of feed for chickens. Future feed prices will depend on whether crop prices decline in the coming quarters.

source: Cal-Maine

What about egg prices?

With the rebuilding of the supply of eggs, their price will certainly fall. This is due to the fact that there have already been sharp increases in the price of eggs in history. This was the case in the United States in 2015. After the rebuilding of the laying hen population in 2015 and 2016, the price of this product dropped drastically. Of course, it is worth mentioning that the increase in production costs will result in a permanent increase in egg prices. Inflation will incur the cost of animal feed, which will force producers to translate the rising costs into prices.

Of course, larger egg producers will be in a better position, because economies of scale will allow for cheaper production than small companies specializing in egg production. It can therefore be assumed that in the coming years there will be further consolidation of the market of egg producers in the United States.

source: Cal-Maine

Eggflation beneficiaries

It goes without saying that the biggest casualty of the rise in egg prices (beyond hens) has been consumers. The increase in prices meant that people had a choice:

• reduce egg consumption
• reduce spending on other products.

Higher food prices have had a negative impact on the poorest consumers. Egg producers, most affected by the blight, also lost. However, producers who kept their egg production at a similar level could benefit from the price increase. This translated into higher revenues and profits. This is because production costs have not increased as dramatically as the increase in prices. This translated into an increase in the margin. In 2016, the beneficiary of such a situation was the company Cal-Maine. This year, the company also benefits from the price increase.

Cal-Maine - plague drastically increases profits

Cal-Maine is an index component S & P 600. This small American company is the largest egg producer in the United States and around the world. It produces both classic eggs and higher quality eggs (specialties). Specialty eggs are free-range, cage-free or fed with better feeds. This group of eggs also includes organic products. The target group for this type of products are people who pay more attention to the way eggs are produced.

source: Cal-Maine

The company sells its products mainly to large supermarket chains. The company's three largest clients accounted for 2022% of total revenue in 45,9. A year earlier, this percentage was 48,6%. He is the company's largest client Wal-Martwhich in 2022 accounted for 29,5% of total sales. As you can see, the company has a very concentrated market of recipients of its products. For this reason, Cal-Maine must take great care of its relationships with its major customers. This is one of the reasons why the company has increased the production of more ecological eggs and eggs “pet friendly”. The egg market is a market of simple products and producers can compete mainly on two variables: price and quality. The larger the company operating in this industry, the greater its advantages over a small producer. It is mainly about the purchasing power of feed and the possibility of optimizing operating costs.

source: Cal-Maine

As you can see in the chart above, the company's profit (light blue line) is very volatile. The period of egg shortage resulted in a historic increase in profit. It was most often followed by a decrease in the margin resulting from an increase in supply and downward pressure on prices. The industry is therefore cyclical and so are the shares of this company. The cyclicality can be seen in the dividend policy. In the financial year 2016, there was a significant increase in profits and the payment of a high dividend. The following years are much smaller profits. It is worth remembering when seeing the huge profits generated by Cal-Maine.

Summation

Eggflation is another term that quickly made its way to the media, after which he quickly began to disappear from the media. The reason for the popularity of the term was the sharp jump in egg prices that resulted from the bird flu epidemic in the United States. This caused a sharp decline in the supply of eggs. This in turn caused a rapid increase in prices.

Temporary supply shocks may cause an increase in commodity prices. It is an elementary. For this reason, it cannot be assumed that the rapid increase in prices will last forever. Human nature and herd effects dictate something else.

There are known stories when, after the sugar price increase, people buy this product from the shelves en masse. It's nothing that their annual consumption is less than 30 kg. “Better buy more so you don't run out”. The surge in demand combined with limited supply creates the impression of unavailability of the product. This drives consumers even more. Of course, after some time the emotions subside, the supply increases and the price decreases. For this fever, customers are left with supplies of sugar, flour or toilet paper for the coming months.