How will avian influenza (bird flu) affect egg and turkey prices?

I was asked to make an appearance on Fox Business with Neil Cavuto this afternoon to talk about the impacts of the avian influenza (aka bird flu) outbreak on food prices.  I had a couple other commitments that prevented me from going on air, but I'll share a few thoughts on the matter here via the lens of ECON 101.

When a farm encounters a case of the bird flu, some birds die and others are euthanized.  This reduces the supply of birds.  In the graph below, this shifts the supply curve (the blue line) to the left.  In the immediate short run, this translates into a direct reduction in the amount of turkey or eggs on the market as the supply curve is perfectly inelastic.  

Consumers are now left to bargain over less quantity, and the shape of the demand curve (the red line) determines how high prices will rise.  The more inelastic the demand curve (the less price responsive are consumers), the greater the price increase.  In the longer run, the industry can adjust by adding new breeding stock, new houses, etc. (this makes the supply curve upward sloping rather than perfectly inelastic as shown in the right-hand graph), so the ultimate price effects will dampen over time.  

This simple economic framework can be put to use to calculate possible impacts.  According to data from USDA-APHIS, there have been around 3.3 million turkeys lost due to the flu.  There are about 240 million turkeys in the nation.  So, this represents a loss of about 1.4% of the turkey supply (this is the size of the supply shift in the quantity direction expressed in percentage terms).  Assuming the elasticity of demand for turkey is about -0.5, this would imply that we could expect a (0.014/0.5)*100=2.8% price increase in the immediate short run.  If the longer-run supply elasticity is, say, 0.8, the the longer-run price increase resulting from this supply reduction would be only (0.012/(0.5+0.8))*100=1.07%.  What if the outbreak grows in size and doubles?  Such that 6.6 million turkeys die?  This would be a 2.8% reduction in supply which would cause a (0.028/0.5)*100=5.6% short-run increase in turkey prices.

Demand for eggs is likely much more inelastic because of fewer substitutes.  The elasticity of demand for eggs is probably somewhere around -0.15 to -0.20.  The USDA-APHIS data indicates that about 4 million chickens (I believe these are egg-laying chickens) have been killed due to the flu.  There are about 300 million laying hens in the U.S., implying this is a supply reduction of about 1.3%.  Following the same logic as before, a 1.3% supply shock in the short run would cause a (0.013/0.15)*100=8.7% increase in egg prices in the immediate short run.  Why so much higher than for turkey?  Because demand for eggs is likely more inelastic than is demand for turkey.  If the outbreak in egg laying hens doubles, reducing supply by 2.6%, that would imply a price increase of 17.3% in the short run.  

There are a couple reasons to suspect these effects may be overstated.  First, exporters have slowed imports of chickens, turkey, and eggs because of the outbreak of the bird flu.  That means domestically - within the U.S. - we'll have more supply on the market because not as much is going out of the country.  Larger domestic supplies will mean downward pressure on  domestic prices that push against the effects of the initial supply shock (although it should be noted that either way, world prices will rise).  Second, the above analysis ignores substitutes.  Higher turkey and egg prices will cause people to substitute toward beef and pork, which will have feedback effects on turkey and egg prices.  

Farm size and community prosperity

Darby Minnow Smith in an article for Grist writes:

“As the total number of farms goes down, the number of big* farms is going up — and this shift hurts rural America. According to an analysis by Food and Water Watch: “Communities with more medium- and smaller-sized farms have more shared prosperity, including higher incomes, lower unemployment, and lower income inequality, than communities with larger farms tied to often-distant agribusinesses.””

I didn't find a lot in the report by Food and Water Watch that would seriously substantiate a causation between increasing the number of small farms and higher income for a community.  What I did find there was a lot of correlational analysis and, in a few spots, some cherry picking of dates to make the argument more convincing.  

First, the article is correct that there is a long-term trend toward fewer, larger farms.  The cause isn't corporatization or greed or any of these factors, but rather increased technological progress that substitutes capital for labor and increases the returns to size.  The driving force on the other side of the supply chain are we consumers who relentlessly demand lower prices, higher quality, and more consistency.

When discussing the book Meat Racket, I previously listed a bunch of research on effects of vertical integration and concentration in animal agriculture (which is the focus of much of the above report). This review of the research by Michael Wohlgenant, for example, concludes:

“Studies on market power in meatpacking indicate that concentration in procurement of livestock (cattle or hogs) has not adversely affected prices received by producers or prices paid by consumers.”

Indeed, as I showed in this article in Animal Frontiers, the long run trend is much more output (due to technology gains) resulting in lower prices for consumers.  

So, what of the argument that communities with more small farms are financially better off than communities with more large farms?  That statistic may be true (or may not; I'm not sure what a representative look at the data would say).  But, even if so, I doesn't necessarily imply causation: that more small farms would increase the economic prosperity of a community.  Rather, I suspect the causation is the other way around.  

Most of the farms in this country are small farms, and you can be defined as a farm if you have just $1,000 is gross sales.  Most of these small farms/farmers aren't making a living from farming and they account for a very small share of the value of agricultural output.  The USDA classifies some of these as "residential" or "lifestyle" farms.  I suspect the more likely direction of causation is that people living in communities that happen to growing for some other reason  can afford to take on a "hobby farm."  That is, my guess is that economically growing communities spur growth in small farms, not the other way around.  

Moreover, if you look at work by my colleagues Brian Whitacre and Trey Malone, what you'll see in their graphs is that farmers markets and CSAs are largely an urban phenomenon.  They write: 

“Generally, in counties where high percentages of Community Supported Agriculture or direct-to-human consumption exist, residents have higher incomes and population density is also high. In other words, the farms that enjoy high levels of support from their local populations are not typically located in more rural parts of the country.”

This leads me to believe that  urban areas experiencing economic growth for reasons beyond agriculture are one of the key causes of more small farms.   So, again, it's not the small farms causing economic growth and vitality, it's the economic growth and vitality enabling small farming.  

Effects of lower commodity prices on food consumers

Yesterday, CNBC ran a story about lower farm commodity prices

“As a strong U.S. dollar and bountiful harvest expectations weigh on agricultural commodities, wheat futures have fallen 11 percent this year while live cattle futures are down 10 percent. Meanwhile, soybeans are down 7 percent, corn is down 5 percent, and sugar futures have fallen by 12 percent—a sharp turnaround from just a couple of years ago, when a drought put severe pressure on crop yields.”

They asked me what this might imply for the food consumer.  Here's what I had to say.

“Still, Americans will not see an equivalent drop in the prices on supermarket shelves, at least not immediately.

”Agricultural commodities are an important component of food prices, but they often comprise a pretty small share of the overall food dollar,” commented Jayson Lusk, a professor of agricultural economics at Oklahoma State University.

Lusk says that the percentage of food prices comprised by the raw materials ranges from as high as 40 percent for beef, to 10 percent or lower for highly processed food products such as those made from corn, wheat and soybeans.

In other words, a 10 percent moves in wholesale oat, sugar, and corn price probably won’t impact the price you pay for a box of Lucky Charms.

Still, “20 to 30 percent [of the overall price made up by agricultural products] does matter, and to the extent those prices fall, we should see lower food prices,” Lusk said.”

and

“Taking the broader view, the story for consumers is distinctly positive.

”Americans spend 10 percent of their disposal income on food, which is about the lowest in the world, and lower than at any time in our nation’s history,” Lusk said. “We’re seeing a very long-term trend toward more affordable food for many.””

Distributional Effects of Selected Farm and Food Policies

The Mercatus center released a report yesterday that I wrote on the farm-to-consumer effects of food policies, focusing crop insurance subsidies, SNAP, and ethanol promotion.  

The federal government subsidizes the premiums farmers pay for crop insurance - often around 65% of the premium.  What effect does that have on farm and food prices?  Here's a summary:

“Federal crop insurance is a textbook example of concentrated benefits and diffuse costs. Most food producers and consumers receive some benefit from crop insurance through the direct subsidy and decreased food prices. Those who stand to benefit most from the program are best able to convince legislators to continue it. But taxpayers as a body, less able to advocate for their own interests, suffer a net loss as money is transferred from the pockets of all taxpayers through higher taxes to the pockets of producers and consumers of food, meaning people pay higher taxes rather than choosing to pay higher grocery bills. The $932 million in projected savings if federal crop insurance were ended represents the deadweight loss of subsidies: the economic cost of transferring money from many to some and the cost of the lobbying necessary to maintain the system.

Some farmers win from subsidies while other farmers lose. While farmers in the plains states that produce the bulk of the food insured by the government would lose money if the program were eliminated, farmers in western states such as California, Oregon, and Washington would benefit because products such as fruit, vegetables, and nuts, which are not heavily subsidized, would no longer be disadvantaged.

Consumers pay more in taxes rather than more at the grocery store. Consumers would pay higher prices for food if subsidized crop insurance were removed, but the benefit to taxpayers more than compensates for the higher food prices. Taxpayers have to pay about $1.80 for every $1 in lower food prices owing to federal crop insurance.”

I also find that SNAP (or food stamps) is a very inefficient form of farm support: for every dollar spent by taxpayers, farmers benefit by only one cent.  A reduction in demand for corn-based ethanol would reduce food - especially meat - prices, while hurting corn producers.  

Update on Meat Prices

It's been a little less than a year since I last weighed in on the change in  meat prices.  So, what's been happening?  

Below is a graph of retail prices from the  Bureau of Labor Statistics over approximately the last five years (from January 2010 to February 2015).

Beef prices (ground beef and steak) have continued their rise, while pork products (pork chops and ham) have come down a bit off their highs in the summer/fall.  Chicken prices have remained relatively steady.  

It is a little easier to focus in on changes by looking at the following graph, where I've plotted the changes in each meat's price relative to its price in January 2010 (and multiplied by 100).

Compared to five years ago, ground beef prices are 54% higher (an annual increase of over 10%) and steak prices are 43% higher (an annual increase of 8.6%).  Pork chop and ham prices are 30% and 39% higher than they were five years ago despite the recent declines.  Chicken prices today are only about 10% higher than 5 years ago (experiencing annual increases of only 1-2%).  

On at least a couple of occasions (here and here), I've discussed the driving factors behind these price changes, and none of that has really changed.  The fact that pork prices are now falling and beef isn't is likely due to the shorter life-cycle of pork relative to beef.  A sow can produce two litters per year (with about 9-12 pigs/litter) and those baby pigs are big enough for our dinner plates in about half a year.  By contrast, a cow will typically have one calf in a year, and it takes a little less than 2 years before that calf becomes our hamburger.  Both hog and beef producers want to produce more animals to take advantage of the higher prices (a move that will eventually bring down prices), but biological lags mean pork producers will be able to respond more quickly.  

So, when will beef prices begin to come down?  If biological lags are the answer, I'd say wait about a year and a half.