Egg Prices Surge to Records as Bird Flu Hits Poultry Flocks

While worst outbreak in U.S. history tightens supplies, grocers avert shortages

By Jaewon Kang and Patrick Thomas of The WSJ. Excerpts:

"Egg prices are hitting records, driven by an avian-influenza outbreak that has killed tens of millions of chickens and turkeys this year across nearly all 50 states. [so this is a supply decrease which raises prices]

Wholesale prices of Midwest large eggs hit a record $5.36 a dozen in December"

"Retail egg prices have increased more than any other supermarket item so far this year, climbing more than 30% from January to early December compared with the same period a year earlier"

"To maintain store traffic, grocers said they have been sacrificing some profits on eggs to keep prices for consumers competitive. Some suppliers are projecting potential relief in price by February or March, but cold weather could hamper production in the near term" [when there is a reduction in supply sellers cannot pass all of the price increase to buyers-see example below about an excise tax-also the cold weather predicted could cause another decrease in supply which raises price]

"“We are trying to keep eggs relatively accessible,” said Dan O’Neill, director of center store and perishables at Angelo Caputo’s Fresh Markets, a chain of eight stores in Illinois.

Angelo Caputo’s bought extra-large eggs for $5.09 a dozen recently, up from $1.30 at the start of the year,"

"Grocery prices have continued to increase this year because of what companies have said are higher costs of labor, ingredients and logistics, helping supermarkets generate higher sales and profits. Those factors have propelled egg prices, too. As eggs get more costly, some supermarkets are selling more organic eggs that are sometimes less expensive than conventional varieties, while suppliers say consumer demand has remained steady despite higher prices." [to say that "consumer demand has remained steady' seems to mean that demand is steep or inelastic so that quantity demanded won't drop much when prices go up-not sure why they say that increased costs helped them generate higher sales-again higher costs reduce supply which means a lower quantity bought and sold]

"the total supply of egg-laying chickens falling more than 5%"

"Despite a tight egg supply and high prices, shortages are still a long way off" [shortage means that price is below where supply and demand intersect-with supply decreasing we get higher prices and a lower quanity-but price may still be where supply and demand increase, so no shortage-a lower quantity being bought and sold this year than last year does not mean that there is a shortage]

"Egg supplies have been more stable this year compared with the previous major U.S. avian-influenza outbreak, in 2015"

"the time it takes for farms to recover from an outbreak has shrunk to roughly three months from six to nine months."

"Wholesale egg prices have been rising for nine consecutive weeks"

"Strong demand has driven prices higher in recent months as people bake more and eat warmer breakfasts during cooler weather" [if higher demand is raising the price that is what could increase profits]

"There aren’t many substitutes for eggs" [if the demand is steep or inelastic, this could be a reason why since most textbooks say that the number of substitutes is one of the determinants of price elasticity of demand]

"Specialty eggs, such as organic eggs that are sold to retailers and distributors on a fixed-price basis, can be about $1 cheaper a dozen, but there are only so many available brands of eggs for operators to secure"

Below is something that I did in class that explains why price does not rise as much as the tax (or rise as much as an increase in production or wholesale costs0.

Here we will look at an excise tax or a per unit tax. Every time a unit of a good is sold, the seller must give the government a flat amount, like $1 (not a percentage). If the government enacts an excise tax, the supply curve must shift up by the amount of the tax.

In the graph below, suppose that an excise tax of $1 is enacted. There is a new supply curve. Every point on the new supply line is exactly $1 above the old supply line.

Notice that every point on S₂ is exactly $1 above S₁. This because the firms in this market now need $1 more dollar for each quantity supplied. Before the tax was enacted, the market needed $1 to supply 1 unit. But now, because of the tax, they need an extra dollar or $2 to supply 1 unit.

The price has gone from $5.50 to $6.00. This means that buyers must pay 50 cents more (or $.50 more). So they are paying $.50 of the $1.00 excise tax. That means that the seller also pays $.50 of the $1.00 excise tax.

When you buy the product, you give the seller $6.00. But they must give $1.00 to the government. Before the tax, you gave the seller $5.50. So now they get $.50 less.

In this case, buyers and sellers evenly split the cost of the tax. But if the slopes of the supply and demand curves were different, the buyers or sellers could pay more than half the tax.