Grocery supply chains: Understanding why eggs cost what they cost
Prices are on everyone’s mind lately. This is not surprising, as food prices have risen over 13 percent since last year. Pandemic, war, climate change and livestock catastrophes are still wreaking havoc on supply chains. And many food companies took advantage of these crises to raise prices even further and reap huge profits. The last couple of years have been the most profitable for corporations since 1950, including many big food retailers and manufacturers. Walmart and Kroger in particular, which together account for almost 40 percent of all grocery sales, have leveraged higher prices and profits to pay out billions in dividends to shareholders. And one study showed that over half of all food price increases are the result of profit mongering by big grocery, meat, beverage and snack food companies. So if you want to understand how prices work, start at the grocery store — possibly at the egg case.
Eggs are one category that can be particularly helpful in illustrating how pricing works in the real world, since eggs are purchased by the vast majority of households. Egg prices have risen dramatically in recent months, affected by avian flu, which scrambled egg production and lowered overall supply. Eggs are also heavily segmented as a retail category. This means that there are multiple price points and quality attributes for eggs. Such segments can be marketed to different customer groups based on income, geography, personal values and tastes. Segmentation is how grocery merchandisers organize and price products, including what stores they are placed in, what shelf they go on and how much space they have (And the dark side of grocery segmentation is when stores in poorer neighborhoods do not sell the widest variety and best quality products, contributing to food apartheid.) Category segments for eggs, such as cage-free, organic and pasture-raised are now available at most grocery stores due to surging interest from consumers. Because they are a single ingredient product with multiple price and attributes segments, they can make it easy to help us understand how retail prices really work.
Imagine a grocery store that sells three different types of dozen-sized egg packages. They have a cage-free store brand, selling for $3.99. The store also has a mass market certified organic brand priced at $4.99. And they have a family farmed, organic, pasture-raised, bells and whistles, super-premium egg marketed at $9.99.
What determines these costs? And how can a consumer determine if those higher costs are worth it?
How each egg was produced
Understanding a bit about how each laying hen was raised will help us understand cost as we break it down. The cage-free hens were raised in large barns, with thousands of birds packed together. The mass market organic hens were raised similarly, but fed organic grain and provided with “access to the outdoors,” which might mean an open door or porch at one end of the barn. The organic, pasture-raised top of the line eggs were produced by hens who had at least 108 square feet of space, constant access to the outdoors, a high quality and varied diet, and the highest possible third-party animal welfare rankings. All of these variables affect the price.
Breaking it down
Each price has distinct elements of cost that are layered upon each other, representing each stage of the supply chain and culminating in what you see on the sticker.
The top layer is the retailer margin, as in how much the supermarket or grocer or grocery delivery service will make from the sale. For the lowest price one ($3.99), the cage-free brand, there’s a 26 percent margin, meaning the store paid $2.96 for that dozen eggs. For the mass market certified organic brand ($4.99), the retailer margin is a slim 22 percent, meaning they paid about $3.87. And for the top-of-the-line organic pasture-raised brand ($9.99), the retailer is taking a whopping 37 percent margin, which means they had $6.29 cost per dozen.
The next layer to peel back is the wholesale markup. Most grocery retailers buy from third party distribution companies, which aggregate inventory from thousands of manufacturers and run high volume facilities on very slim margins. Wholesalers are invisible to consumers, except for when you pass their tractor trailers on the highway. There are only four wholesalers that service the vast majority of grocery stores, making grocery wholesale very consolidated and giving the wholesalers a lot of power. Brands usually have little recourse on which of these middlemen to sell into if they want to be sold by a given retailer.
Wholesale markups (what they charge the brand or packing operation, if there is one) can be inclusive of the trucking or freight costs of getting eggs from the producers to distribution and then into stores. They usually range from 10-15 percent above the brands’ cost. Wholesalers will also require marketing programs and will deduct from supplier invoices for shrink, loss, damage and re-stocking, so this means another 5-10 percent in costs to the egg brand. Larger egg producers usually have more leverage to refuse such programs, while emerging egg brands have little recourse. All in, the wholesale stage of the supply chain may costs egg brands between 10 and 30 percent above costs. This all translates into the wholesaler paying the brand or packer $2.67 for the cage free eggs, $3.29 for the organic, and $5.03 for the pasture-raised organic eggs.
Next, we take this one step back to the packing operation, which is managed by the brand whose logo you see on the label. In this thought experiment, the cage-free and organic eggs are packed at a large-scale, third party operator who sorts, washes and packs the eggs into cartons. On the other hand, the top shelf pasture-raised brand is small enough to handle sorting and packing on site themselves. We’ll estimate that the packing operation takes 30 percent to cover their labor-intensive overhead, resulting in costs for the wholesaler for the cage-free, organic and top shelf pasture-raised eggs of $1.86, $2.30 and $3.52 respectively.
The next level down the egg supply chain would be the overhead and marketing expenses of the brand. For the cage-free and organic egg brands, we will assume these are egg marketers that contract for eggs from independently owned farms, while the pasture-raised brand is a small, vertically integrated operation. (And for the sake of argument, we will eliminate middlemen from this equation, as many egg marketers use brokers to procure eggs. That is a story for another day.) We will assume that each of these egg brands are taking about a 40 percent gross margin to fund their operations, including salaries, rent, utilities, travel, marketing and promotional expenses, shrink and maybe even a profit margin. This gets us to what is essentially the farmgate cost, or what the brand paid to the contract producers for the eggs before packing, marketing and distribution. For the cage free-eggs, this would be $1.12, for the organic, $1.38 and for the top shelf pasture-raised, $2.11. Here at farmgate, the difference in costs between the three types of eggs are not as vast.
The cost of feed
But we can still go a layer deeper to understand what is affecting cost. For eggs, feed is typically a whopping 50-70 percent of the base cost for the producer. The other 30-50 percent accounts for all of the other costs, including wages for the workers, mortgage payments, utilities and possibly a small sliver of profits, assuming the farmer was paid above the cost of production, which does not always happen.
Labor costs tend to be higher for higher-attribute eggs that require more open space and time to harvest eggs and care for the birds. But on a positive note, this also means that paying a living wage for farmworkers would have a negligible incremental effect on the shelf price, while obviously making a huge difference in the lives of farmworkers. And top-shelf eggs come from farms with much lower hen density, thanks to the required 108 square feet of outdoor space.
In this scenario, feed costs respectively for cage-free, mass market organic and organic/pasture-raised would be $.73, $.97 and $1.59 per dozen eggs. These costs are dependent on many factors, particularly the type of feed and where it is sourced from. The cage-free hens are fed conventional (non-organic) feed, while the organic and pasture-raised eggs both require certified organic feed. The mass market organic egg is likely importing or contract buying feed from grain traders or brokers who are shipping it by the container load, bringing down the price per pound per bird. The pasture-raised organic brand does not yet have economies of scale and may be growing its own feed or contracting with a local mill for a specific grain blend tailored to outdoor hens. The pasture-raised birds also get some supplementary nutrition from bugs and grubs in the grass, resulting in an buttery, orangey-yolk — a major selling point — but the majority of their calories are still from grains.
The cheap conventional feed is among the largest factors in these different costs. Such feed is usually genetically modified (GMO) corn and/or soy, meaning it has been heavily sprayed with herbicides. Agrichemicals like these usually end up in waterways, soils and across rural environments, and on the clothes and in the lungs of farmworkers. Herbicides like glyphosate (the primary ingredient in Roundup), paraquat and dicamba are linked to cancer, Parkinson’s and other chronic ailments in the farmworkers who apply them to crops. The costs of the eggs from hens raised on these grains are externalized onto our public health system and the degradation of our environment, essentially subsidized by taxpayers and Mother Nature. These costs don’t end up in the base price of the eggs. They also keep the heavily consolidated agribusiness sector highly profitable. USDA programs such as crop insurance and subsidies stabilize the supply of such conventional crops, de-risking them for the supply chain and keeping them readily available.
The organic grain market has grown in size considerably, organic crops only get a small fraction of the government support given to competing conventional commodities grown for animal feed, ethanol and food processing.
But what if the feed costs were equalized at $.73, the conventional feed cost, between all three egg types? That would level the retail playing field a bit. This could hypothetically happen through public subsidies and stricter production standards linked to receipt of government funds, or a true cost accounting formula that took into account all the externalities of feed production. This idealized scenario would result in a 12 percent lower wholesale cost for the organic eggs and a massive 26 percent lower wholesale cost of the organic/pasture-raised eggs. This is the price tag of externalized costs and public subsidies.
But would that make the premium eggs cheaper for customers at the grocery store? Not necessarily.
The retailer makes the rules
The other big variable in the consumer price of eggs is the retailer’s gross margin. Retail margins in the egg case, range from 0-30 percent. Across the store, retailers typically subsidize low priced mass market items through higher prices on premium products. Retailer profitability is a weighted average of the unit volumes and margin rates of thousands of products. The retailer is likely taking slimmer margins on the cage free and organic eggs, because the market is competitive for such products. And the retailer is probably also taking a heftier margin on the pasture-raised organic eggs because they assume that customers are willing to pay a higher price.
This widespread strategy favors incumbent big legacy brands with conventional practices while handicapping innovative emerging brands raising the bar on, say, egg production. In this case, this puts the onus on the pasture-raised brand to really tell its story. Why should a customer pay ten dollars for a dozen eggs? How are the chickens treated, are these eggs really that much more tasty or nutritious? Can these eggs restore the climate and repair the food system? Can they sell enough to matter?
If costs such as chicken feed and retail/wholesale margins were equalized, it could make a huge difference in the shelf price of the “higher attribute” eggs, making them more accessible to a wider group of people. If organic and regenerative feed costs could be subsidized to equivalence with conventional, as mentioned earlier, and retailer and wholesaler margins were limited to 22 percent and 10 percent respectively, pasture-raised organic eggs would cost only $4.59, literally half the price to the consumer than we started wit. Likewise for the organic eggs, which could be sold at $3.89, nearly at par with the price of cage-free. And for the retailer, this may seem like taking a big loss, but retailers do this all the time voluntarily to retain customers or grow market share on particular categories. Why do you think their store brand products are 30-50% cheaper that name brands? The retailer is not only getting lower costs, but they are investing in price in order to foster consumer loyalty and repeat purchases. Retail price is totally arbitrary.
Who pays for good food?
Of course, this all assumes that the public should be subsidizing production. The other option would be to fully subsidize consumption of good food, making access to good food a right and good food a common good. The retail price gaps could be eliminated by reimbursing consumers to buy regenerative and organic products, either through an expansion of SNAP, or through tax credits or other fiscal policy means that could heavily spur demand. Such a plan was proposed after the end of World War Two and the New Deal. Called The Brannan Plan, it would have greatly expanded consumer subsidies for basic foods, ensuring everyone had enough to eat. But it was scrapped in favor of federal subsidies for the growing agribusiness sector that instead promised cheapness and abundance through corporatization of the food industry, which continues to this day.
Even in an inflationary setting where retail prices have been hammered by feed costs and supply challenges, there are many elements of cost that contribute to what you see on shelf. Enormous public subsidies, extractive business models and devastating externalities are built into the system through federal farm policy and the demands of a capitalist economy. Yet it would only take a few changes in how we value these layers in the supply chain to make good food affordable and accessible to all.