Picture of Christopher A. Hopkins, CFA

Christopher A. Hopkins, CFA

Consumers shelling out a little less for an omelet

Amidst the surge in consumer prices during 2022, few items spiked as sharply as the price of eggs. According to the USDA, the average price of a dozen Midwest Large grade A eggs at the grocery store surged from $1.79 in January to $5.46 by late December, a 205% increase. In California, where state law mandates all eggs be produced in cage free environments, try $7.50.

Thankfully, some relief is at hand as recent average prices have receded by about a third to $3.64 per dozen since the December peak, although still more than double the cost from a year ago and 4 times the 2021 price. While industry analysts expect more relief, the progress is likely to be slow thanks in part to Putin, lingering supply chain issues, and new regulations. But by far the biggest contributor to the clucking over egg prices is a bunch of sick chickens.

A virulent strain of avian or bird flu began appearing in in the US in February of 2022. The virus causes a severe respiratory infection and is easily transmitted from wild flying birds to domestic poultry like chickens and turkeys. The currently dominant strain carries a 90%-100% mortality rate among the chickens it infects, requiring farmers to destroy entire flocks in order to eradicate the infestation. It is estimated that over 10% of all the laying hens have been culled from production, cutting egg production by nearly 1 billion in December versus a year ago, just as demand from seasonal holiday baking was surging.

The current outbreak has now surpassed the 2015 outbreak of avian flu, previously the worst animal infestation in US history which killed 50 million birds in 21 states. The 2022 virus has led to the destruction of 58 million chickens including 40 million egg laying hens across 47 states.

In addition, virtually all other input prices have risen simultaneously for egg farmers, including feed and labor costs. Feed prices in particular have surged by 50% thanks to high diesel fuel costs and the disruption of grain exports from Ukraine. The metaphor of the golden egg became much more literal by the end of 2022.

Meanwhile, egg consumption has been increasing in the US. Peaking at 405 eggs per person per year in 1945, Americans cut back to an average of 232 per year by 1995 partly in response to health concerns. Since then, as our estimation of the nutritional benefits has become more nuanced, annual consumption has risen to 280 eggs per capita, roughly equal to the production of one hen. There are normally around 330 million laying hens in production in the US, with 87% busily engaged in making breakfast and 13% dedicated to making more chickens. In this instance, the chicken comes first.

Ironically, as egg prices have been rising, poultry meat prices have fallen slightly in December. Commercial egg producers raise only a few hybrid species of layers that have been bred for maximum productivity over an 80-to-100-week life cycle and only begin producing eggs after about 20 weeks. Meat birds, called “broilers”, are distinctly different breeds that possess more musculature and mature more rapidly, typically over a 6-to-9-week span before slaughtering, and are less susceptible to contracting the virus. The meat bird population actually grew by 5% last year, holding meat price increases to a more modest 11% year over year. It is also worth noting the broilers are clearly more committed to their assigned mission.

This particular avian flu outbreak has been uniquely challenging. Previous strains have tended to last only a season and are usually self-eradicating with the onset of warmer weather. This variety has been especially stubborn, surviving through the summer and fall and into winter, and has persisted throughout Europe for two years now. 

Price relief may also be impeded by implementation of new regulations. In addition to laws already in force in California and Colorado, at least 8 additional states are phasing in requirements that all eggs sold be cage free by 2025, with more likely to follow.

However, there is some good news in the henhouse. Egg producers have become more highly attuned to the risk and have taken more precautions to prevent or slow the spread of the virus. In addition, during the 2015 outbreak, it took an average of 9 months to replenish the laying hen stock; today the time has shrunk to about 6 months to restore the flock.

There is also progress on developing preventive treatments. European and American scientists are close to rolling out an effective vaccine to tamp down the most virulent strains of avian flu. These inoculations will not be available to address the current outbreak but hold promise for prevention of future infestations. One unknown factor is how many birds will refuse vaccination.

Egg prices should continue to decline steadily throughout the first few months of 2023 as the infestation abates, other input prices moderate, and more hens come home to roost.

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