Egg prices in California are up. Way up, so much that some are smuggling eggs into California from Mexico. The price of a dozen eggs is close to $7 in California, about double the price from last summer. This represents perhaps the largest percentage increase in the US, on top of the already high price for California eggs that has prevailed for several years.
The reason behind the rapid rise since last year is an outbreak of avian flu among US chickens, which has reduced the number of hens substantially throughout the country. As the disease subsides and the stock of hens increases, egg prices will decline, but prices in California will continue to be the highest in the country. Why? Regulations that have raised the cost of production and reduced the number of hens in the state and which may have reduced competition in the state’s egg industry.
Regulations are about advancing the humane treatment of chickens (and other farm animals) have raised production costs and prices. In 2008, California voters approved Proposition 2, known as the Standards for Confining Farm Animals Initiative, which required that farm animals in cages, including egg-laying hens, be in cages large enough to allow them to turn around. The regulation took effect on January 1, 2015, to give producers time to adapt to the new law.
In 2018, voters passed Proposition 12, known as the Prevention of Cruelty to Farm Animals Act, which required cage-free hens by 2022. Proposition 12 also requires eggs from other states to be from cage-free hens to protect in-state egg producers from lower-cost competitors outside of California.
These regulations have raised production costs and reduced the number of egg-laying hens in the state. In 2014, before Proposition 2 went into effect, there were about 19 million egg-laying hens in California. More recently, there are only about 14.5 million hens in the state, reflecting higher costs and fewer producers. Nearly two-thirds of California’s eggs are now produced out of state.
Purdue University economist Jayson Lusk analyzed USDA egg price data for 2022 and found the average difference between the lower national price and the California price increased from about 70 cents per dozen in November and December 2021 to $1.42 per dozen under Proposition 12 in January. He concluded that “California egg prices are 72 cents/dozen more expensive after the 1st of the year than they would have been if the California price-premium had (stayed) at 2021 levels.”
As costs have increased, egg producers are leaving the industry. The Farmer John Egg Farm in Bakersfield, California, is shutting down because the $5 million investment required to retrofit their farm to comply with the cage-free regulation wouldn’t be economically feasible. The farm once had 300,000 egg-laying hens but stopped production last year when Proposition 12 went into effect. Since last year, Farmer John has been operating solely as an egg distributor, but despite the very high retail price for eggs, wholesale egg prices have risen just as much or more, squeezing his distribution margin.
A key reason why wholesale egg prices are higher is that the state is importing nearly two-thirds of its eggs from cage-free hens in other states, reflecting lower in-state production. And importing eggs from other states means higher transportation costs.
As California egg producers have shut down, in-state competition has dropped, which may provide the largest California producers with some market power over prices. Gemperle Farms, with 8.6 million hens, is the state’s largest producer, accounting for over 50 percent of California’s stock of hens.
This may all change in the future. Proposition 12, which requires cage-free eggs, among regulations for other farm animals, has been litigated since it was signed into law and is now at the US Supreme Court. The constitutional argument against the law is that it violates the Constitution’s commerce clause, which holds that only Congress can regulate commerce among the states. The key question that the Supreme Court is presently addressing is whether California can require higher welfare standards for farm animals that are raised in other states if products from the out-of-state animals are to be sold in California. The petitioner in this case is not egg producers but rather a national industry trade association for pork producers, who worry that Proposition 12 regulations for pork will substantially drive up those costs.
An economic argument that may be interpreted by the court against Proposition 12 is that not only is California a large market for pork products, with 39 million people, but that it imports most of its pork from other states. Since California is such a big market for out-of-state pork producers, the requirement that other states adopt California’s regulations if they wish to sell in California may adversely affect producers in other states significantly, which may lead the court to conclude that Proposition 12 amounts to California regulating intrastate commerce.
California eggs are like California gasoline, in that both products are expensive compared to their counterparts in other states, and they are expensive because their production costs are higher. California gasoline is more costly to produce, as it burns cleaner than gasoline in other states; California eggs are most costly to produce because of humane animal regulations.
It is understandable that many Californians value animal welfare highly. But many of those who are hurt by Proposition 12—and by high California gasoline prices—are low-income households, including more than 13 million Californians who qualify for Medi-Cal, the state’s Medicaid program. Qualifying for this program requires that most recipients earn less than 138 percent of poverty-level income, which for a family of three (the average household size in California) is only about $41,000 per year.
There are trade-offs involved in implementing regulations, such as California’s Proposition 12. But rarely do those who write the laws consider those trade-offs, much less how they may impact those who are hurt the most by them.
