Is Inflation Created By Corporate Greed? Evidence From The Current Egg-Flation Episode

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  • “…[we] call for FTC to investigate record-high egg prices…price gouging, price coordination, and other foul play on the part of dominant egg producers…a collusive scheme to turn inflationary conditions and an avian flu outbreak into an opportunity to extract egregious profit…” – From a petition by an advocacy group to the Federal Trade Commission (Jan 19, 2023)

Eggs…eggs! – are a meme now, an inflation meme (The New York Times says so – “home cooks are flocking to the Internet to lament skyrocketing prices”). An 11% month-over-month surge in December was the largest gainer of the more than 200 separate components of the Consumer Price Index. Over the last year, the average price of dozen eggs is up 137% – and it has tripled since the start of the pandemic, emblematic of the “runaway inflation” that haunts the imagination of many amateur and even some professional economists.

The press has put forward the conventional hypotheses to explain egg-flation, which are reviewed, and refuted, in the previous column (here).

The true cause is simple: the egg industry has been hit by an epidemic of avian influenza – “an extremely infectious disease, mostly fatal to poultry, that can rapidly spread.” It is the most severe outbreak in American history, and has led to the destruction of something like 15-20% of the egg-laying flock. In some states, the numbers have been more extreme. In Colorado, for example, 85% of all egg-laying hens are reported to have been “depopulated.”

  • “Since early 2022, more than 49 million birds in 46 states have either died as a result of bird flu virus infection or have been culled (killed) due to exposure to infected birds. This number is nearing the 50.5 million birds in 21 states that were affected by the largest bird flu outbreak that occurred in 2015. Even so, the number of states affected in 2022 [47] is already more than double the number of states that were affected in 2015.” – The Center For Disease Control (Nov. 3, 2022)

The impact on supply is greater than just the number of culls. The egg infrastructure is massive and delicate. There are more egg-laying hens in this country than there are human beings, and each one produces almost one egg per day, day after day, well over 100 billion eggs a year, an enormous self-replicating biological engine, discharging a gigantic flow of its fragile, perishable commodity across a continental-scale economy. The system is exquisitely vulnerable to disruption. Dense flocks are monocultures wide open to epidemic storms. Infection slows a hen’s egg production even before it kills her. A single infected bird may mean culling thousands or hundreds of thousands in the flock. Replacing the lost capacity takes time, and must meet strict requirements. The government puts its hand in, to specify, regulate and redress. We’ve seen this movie before.

The 2015 Precedent

In December 2014, highly pathogenic avian influenza (HPAI) was detected in the United States for the first time in 10 years. The subsequent outbreak was called “the largest ever recorded in the United States and arguably the most significant animal health event in U.S. history.” By the time the epidemic had ended in June 2015, about 43 million egg-layers had “died or were depopulated.” Counting the turkeys as well, over 50 million birds were culled. The cost to the U.S. economy was estimated at $3.3 Billion by the USDA.

The impact on egg prices lagged the trajectory of the epidemic, a pattern typical pricing trends following supply shocks. In the case, part of the lag is created by economic factors. The market’s response is delayed as inventories are worked off. Another component of the delay is dictated by public health measures:

  • “Farmers with flocks that become infected must complete a carcass disposal, followed by thorough cleaning, disinfecting and a 28-day downtime period where they are unable to start raising flocks. The state also has to complete surveillance testing on birds before they’re cleared to enter commercial markets. The entire process can push producers back by 10 to 15 weeks.”

And part of the delay is simply biological, as new replacement hens “take about four to five months to reach peak productivity.”

In any case, the main economic impact in 2015 occurred well after the disease itself had been eliminated from the egg-layer population. Prices rose over 50% (year-over-year) and remained elevated for several quarters following the end of the outbreak. It took about nine months after the virus was eradicated to restore normal laying volumes, and to restore equilibrium in the market and bring prices down.

The effect on egg prices was not just one-way. Egg producers’ efforts to boost production were all too successful, and created an overshoot to the downside – a glut of eggs, with deflationary consequences. A year after the epidemic ended, egg prices were dropping 40-50% year-over-year. By 2017, the news was focused on the distress for producers caused by extreme low prices.

All this bears on the current situation. The 2022 avian flu outbreak is said to be more severe than the 2015 episode. The earlier outbreak was largely confined to the Upper Midwest (99% of infected birds came from Iowa, Minnesota, Nebraska, Wisconsin, and South Dakota). The 2022 epidemic has spread to every state except Louisiana, West Virginia, and Hawaii. According to an academic specialist in avian diseases cited by The Washington Post,

  • “This virus is very different — it’s a much meaner beast than in 2015. The 2022 virus has a bigger reach and affects more geographic locales…”

It not over yet. There were more than 60 new outbreaks, in 22 states, in the month of December 2022 alone.

The current epidemic should eventually follow a pattern similar to the one in 2015: shock, recovery, and overshoot, with prices whipsawing wildly. The trend has almost nothing to do with shifts in demand for eggs, which is distinctly inelastic. Egg price inflation, and deflation, then and now, are the direct, mechanical consequences of this supply constraint and its eventual resolution.

The episode also bears our understanding of inflation in general. Post-pandemic price increases throughout the economy have mostly not been not caused by demand spikes or the growth of the money supply or fiscal irresponsibility or inflationary expectations or the phases of the moon. The egg cycle is a microcosm of the broader post-pandemic inflation phenomenon, which is also driven principally by supply constraints, is also transitory, and will be self-correcting (without any particular help, and perhaps some considerable hindrance, from the Federal Reserve’s monetary maneuvers).

The Greed Theory

But the human psyche is often dissatisfied with answers that seem too simple, or too arbitrary. Many would rather attribute events — especially negative events – to complex and perhaps hidden human agency. And so, this week the proponents of still one more “theory” of inflation have weighed in on the egg question.

On January 19, an advocacy group called Farm Action filed a formal petition with the Federal Trade Commission, calling for an investigation into alleged anticompetitive practices by egg producers, aimed at jacking up the price of their products and thus harming consumers. This is the Corporate Greed Theory of inflation. Or, if you prefer a more malevolent expression, call it the Evil Capitalism Theory. In a few words, the Greed Theory holds that inflation often is caused by companies who take advantage of some shock or distress – war, especially, or an outbreak of avian flu, say – to extract unfair gain from the suffering and confusion of the public. It is rooted in a dark and conspiratorial view of the world.

  • The public tends to think of inflation as an indicator of a cycle of greed and inhumanity, as a conspiracy to rob them of their buying power.” – Robert Shiller, Yale U. economist

Greed in the Egg Industry?

The Farm Action letter to the FTC states the case for such greed as the true source of the egg price surge. The authors of the letter see dark forces behind all this.

  • “…price gouging, price coordination, and other unfair or deceptive acts or practices…a collusive scheme among industry leaders to turn an avian flu outbreak into an opportunity to extract egregious profits reaching as high as 40 percent…. profiteering…cartelistic conspiracies…extorting billions of dollars from the pockets of ordinary Americans through what amounts to a tax on a staple we all need: eggs.”
  • “They had power and weren’t afraid to use it…[it is] organized theft…We urge the FTC to promptly open an investigation into the egg industry, prosecute any violations, and ultimately, get the American people their money back.”

Greed as the culprit – is an old idea, as old as markets everywhere, and for some it is a perennially attractive explanation for high prices. In this view of things, the Seller is exploiting the Buyer, or seeking to do so. Greed theorists believe that there is corrupt motive and damnable self-interest behind almost every instance of economic pain. The language is often quaint – price gouging, profiteering, collusion – and the sense of outrage is strong.

Restraint of Trade?

As evidence of the behavior pattern underlying this “conspiracy,” the Farm Action letter cited a court case from 2019 in which a jury found that leading egg producers had agreed to take certain measures to “restrain production” and raise prices. But the jury also found that the measures were “reasonable.”

What were these anti-competitive but somehow reasonable measures? Specifically, the United Egg Producers Association (an industry trade association) had established a Scientific Advisory Committee to recommend measures for improving animal welfare. One of the recommendations involved the size of the cages in which the hens are kept. The advisors recognized, in an aside, that this might have an impact of flock size:

  • “An industry-wide policy of a minimum floor space allowance would result in a more ideal national flock size. It is currently estimated that 15-20% of the nation’s birds are housed at less than 48 square inches. If 48 square inches were adopted as the minimum space allowance, millions of extra birds would be eliminated.”

The plaintiffs saw this as a charade:

  • “UEP created its Scientific Advisory Committee solely to lend artificial legitimacy to UEP’s animal welfare guidelines.”

The jury didn’t see it that way.

  • “Because the jury found that the conspiracy did not unreasonably restrain supply, the jury did not reach the issue of injury [i.e., no damages or penalties]… One of the restraints involved an agreement to increase the size of the cages used for the hens laying eggs. The courts appear to have concluded that an agreement among competitors to increase cage size could be a lawful cartelistic conspiracy.”

What is the cost of a more humane food chain? Have you purchased “cage-free” eggs, or “free-range” eggs? Pasture-raised? Organic?

These essentially humanitarian measures, designed to move away from the brutal, industrialized animal cruelty of caged egg-laying flocks, drive higher costs of production. The state of Colorado (for example) has just mandated (as of Jan. 1 2023) that all eggs sold in the state should be “cage-free.” It is estimated that “producing eggs in a cage-free system costs an estimated 36% more than in a conventional production system.” Free-range eggs cost more, and organic free-range even more. [Side comment: If you delve much into the literature on this subject, you may find that you are quite willing to pay more to support a more humane system.]

Is improved animal welfare an anti-competitive policy? Is it designed to “rob” consumers? I don’t think so. Animal welfare measures are now being mandated for egg farms in many states, and are generally accepted and viewed as a sign of progress in the industry. The impact on industry costs is gradual, and indeed still accounts for just a quarter of the industry’s capacity.

Evidence: Excess Profits?

The Farm Action letter to the FTC also cited the purportedly much higher profits realized by the industry leader (Cal-Maine Foods, Inc) in the last year.

  • “Cal-Maine reported a ten-fold year-over-year increase in gross profits and a five-fold increase in its gross margins.”

There are a couple of things to say about this.

  1. The company did grow its gross margin in 2022 — from a very low level in 2021, a year in which it lost money on an operating basis.
  2. The fiscal 2022 gross margin of 19% was was slightly below the company’s 15 year average, and well below the 33.2% average gross margin for all U.S. firms.
  3. The company’s gross margins and operating margins do show a moderate positive correlation with the price of eggs (which is to be expected in a commodity industry).

Is there a case for the Greed Theory here?

Companies are in business to make a profit. They will of course try to protect their margins, and pass through their increased costs to their customers when they can. Is this “evil capitalism” — or free enterprise?

Prices are often “sticky” with respect to changes in input costs. When crude oil prices drop, gasoline prices fall less quickly and profit margins expand temporarily. Uncertainty creates this anomaly and competition eliminates it, with a delay. Is this price gouging? Or market friction?

Most important, though, is the elate of the industry. Eggs are a commodity. Corporate pricing power in a commoditized industry like the egg business are weak.

Cal-Maine’s “extra” gross profit in 2022 (over 2021) was about $175 million. That is what they are alleged to have “stolen” from egg consumers. The company has a 20% market share. The value of the sales of eggs in the U.S. more than $10 billion annually. Even if assume that all the privately-held egg producers in the country experienced the same expansion of their gross profit, it would only account for an extra 7-8% or so of cost burden on consumers. It cannot explain a 137% increase in the price.

In sum, the Greed Theory is not a persuasive explanation for the surge in egg prices. The true drivers are (1) the avian flu, (2) the built-in delays in restoring supply/demand equilibrium to a multi-disrupted industry, and (3) perhaps, over a longer term, the gradual adoption of more humane (and somewhat more costly) egg production methods with somewhat higher costs.

The Greed Theory In A Broader Contexts

The Greed Theory of inflation has been periodically popular with some politicians on both sides of the political spectrum. It resonates with consumer and voter discontent. Last summer, President Biden famously accused the oil companies of “war profiteering” and of taking advantage of Hurricane Ian’s impact on the Gulf Coast oil production zone to train gas prices and gouge the public. He channeled his Rooseveltian ire:

  • “Do not — let me, repeat, do not — do not use this as an excuse to raise gasoline prices or gouge the American people. … This small, temporary storm impact on oil production provides no excuse — no excuse — for price increases at the pump. None. If companies try to use this storm to raise prices at the pump, I will ask officials to look into whether price gouging is going on.”

On another occasion, and another industry, the President’s press secretary explained his views of the causes of food inflation –

  • The President, the Secretary of Agriculture have both spoken to what we’ve seen as the greed of meat conglomerates. That is an area — one where people go to the grocery store and they’re trying to buy a pound of meat, 2 pounds of meat, 10 pounds of meat, it is — the prices are higher. That is, in his view and the view of our Secretary of Agriculture, because of — you could call it ‘corporate greed.’ Sure. You could call it ‘jacking up prices during a pandemic.’” – Jen Psaki (Dec. 14, 2021)

It is interesting that the Greed Theory seems to be applied most often to commoditized industries – gasoline, meat, eggs – where corporate pricing power is weak. In general, the idea that corporations can exercise this kind of control over market prices is viewed with skepticism these days. If some companies do have pricing power, it is where they may have a non-commodity product with strong brand equity, design equity, or other “moats” (as Warren Buffett refers to them). Think Apple, or Tiffany’s. In any case, “greed” does not explain the egg price surge, and it is doubtful it has validity in any more general context.