Never Trust A Politician With Your Money

They Don't Understand Economics

This past week, a giant in the accounting professorial profession passed away. Roman Weil was a Chicago Booth prof. I never took him for a class, but my friends did. He was a maniac. He had a gong in front of the class, and like John Houseman in the “Paper Chase”, he’d grill people in his class. He was old school.

One piece of his research was that the financial literacy that corporate board audit committee members have is surprisingly weak and that the gains in shareholder wealth accompanying improvement in such financial literacy are both significant and large. I would have loved to see him research politicians because, in my experience, most of them are pretty dumb.

Here is a recent tweet about the price of eggs from Nevada Democratic Senator Carol Cortez Masto. It’s so ignorant, it is offensive.

Senator Cortez Masto @SenCortezMasto

On average, Nevadans are paying nearly $6 for a carton of eggs. If House Republicans passed their 30% national sales tax proposal, our families would have to pay over $7.80 per dozen. That's ridiculous - we need to lower costs, not raise them.

We will save the debate on the Fair Tax for another post. Let’s dig into the price of eggs.

Why are egg prices so high right now? It’s always been the cheapest form of protein.

There are a number of reasons. The first, is there are no futures markets in eggs. There used to be but the total consolidation and vertical integration of the chicken market ended the futures market. There is no way for producers and consumers to hedge risk. Here is another example of what futures markets can do for products. Oil is significantly less volatile in price than onions. There is no futures market for onions.

Second, there are a lot of newer regulations around raising chickens that raise the price. Animal activists have entered the farm market and gotten their way. They have done this in the pork market as well. Requiring cage-free chickens increases the cost of growing chickens and eggs. Many farmers didn’t want to retrofit barns and instead just exited the business.

This is why a lot of the slow and natural food movement is bunk when you think about mass scale. I have no problem with it and even enjoy a lot of the products that come from it. You can’t mandate a slow food movement or natural food movement. It has to be a choice, not a mandate. If you mandate it, you drive up all prices and people can’t afford to feed themselves. Factory farming might be distasteful to a lot of people but you know what’s more distasteful? Not being able to eat. Never solve a problem by making the middle class and poor pay for it.

Another regulation cited in the WSJ article I linked to above is that in California food stamps must be used to buy eggs, increasing demand. Not only that, but you had to buy white eggs. Why not brown ones? No doubt, there are probably regulations that it has to be cardboard cartons, not plastic ones.

Yet another hurdle was the cost of natural gas. Natural gas has been plummeting in price lately but for a while, it was at all-time highs. Most farm operations use natural gas to heat barns and operate some equipment. The Biden Administration's war on natural gas caused some farmers to exit the market.

The cost of feed last year went a lot higher because of the Biden Administration's total screw-up on Ukraine causing a war. Fertilizer prices went up. Biden’s war on fossil fuels caused transportation costs to increase. The price of diesel more than doubled. When it costs more to raise your crop and transport it to market, it impacts your business.

Farmers culled their chicken herds. We saw the price of a chicken drop in supermarkets. The wholesale price for chickens dropped by over .30 per kilogram. Prices at the supermarket for chicken are down 1.3%. When prices drop, farmers produce less. It’s that old supply and demand thing. My guess is the future price of chicken will increase since there are fewer chickens and fewer eggs.

For what it’s worth, it takes six months to get a chicken reliably lay eggs. It takes 7-9 weeks to get a chicken from the time it emerges from its egg to market. Incubation adds three weeks to that, so a total of 10-12 weeks.

Chickens lay fewer eggs in the winter months. That’s a natural cycle. Additionally, demand for eggs increases in winter months because of holiday cooking. Supply constrained, demand up, what happens to prices?

Another primary cause is the vertical integration in the chicken market. That happened years ago. Vertical integration is both a blessing and a curse. Tyson ($TSN) and other poultry giants were able to consolidate the entire market. They are able to control every facet of production from the choice of the chicken breed to the end product. It brings economies of scale and scope to the chicken business. They can bring all kinds of quality control and standardization to the market. The curse is if you want to start a chicken operation, the wall of competition you face is gigantic. Your costs will be a lot higher than Big Corporate Chicken and good luck getting your chickens to slaughter because they already have 100% of the slaughterhouses tied up.

Sure, we can have backyard chickens but that has a cost. Chickens smell. The manure is slippery and you have to dispose of it. You have to keep the chicken coop clean. You also have to feed them and anecdotally the feed most people use from Tractor Supply supposedly hurt the egg-producing ability of chickens. I don’t know if that is true or not. In a crisis, people will look for any plausible answer.

Of course, the mainstream media is pointing to Avian flu as the cause. Avian flu is one cause for sure. It’s highly contagious, and when a flock is infected the farmer has no recourse other than to kill the entire flock. Less chicken means higher prices. Avian flu is spread by wild ducks and geese. Of course, with cage-free laws in effect, a farmer can’t protect their flock from interacting with a wild bird that might have the disease. Additionally, even though there are plenty of geese, it’s illegal to hunt them out of season. Just go to any golf course or public park pond and you will see there is no shortage of wild geese.

So, you can see why the Senator’s tweet is so offensive. It’s ignorant.

The real reason chicken prices are high is that the government has regulated the market, and tangent markets so much, supply is restricted. The regulations put down by the FDA and USDA enabled corporates to dominate the market making it anti-competitive. Of course, the people in charge today think supply-side economics is “trickle-down”. What they don’t understand is that their policies have reduced supplies to a trickle and you are paying the price for it.