High egg prices send profits at largest US producer soaring more than 700% | Hacker News Reader

High egg prices send profits at largest US producer soaring more than 700%

cnn.com

55 pointsmyshpa41 comments

An alternative hypothesis/interpretation to "price gouging:" An operation that had good virus safety practices is reaping the benefits of that effort by capturing the profit that would have been distributed across other operators. Isn't that the way things should work?

A deadly and highly infectious avian flu has forced US farmers to kill millions of egg-laying hens, reducing the country’s egg supply and driving up prices. But Cal-Maine said in its earnings statement that there have been no positive tests for avian flu at any of its owned or contracted production facilities.

At 20% of the market capturing even 100% of competitor profit wouldn't explain a 700% profit increase on capture alone. From that view additional profit is being generated because of the shortage event, not just being directed to companies that did things "right". Whether or not you think that's reasonable though is pretty much the definition of whether or not you think it's price gouging.

> Whether or not you think that's reasonable though is pretty much the definition of whether or not you think it's price gouging.

Define "price gouging".

Is charging the price the market will bear based on supply and demand "gouging"?

Look, I personally think markets need to be regulated to serve the people.

But one person's "gouging" is another person's free market price discovery during a supply shock.

Unless there's evidence of cartel-like behaviour--i.e. price fixing--this is just the way free markets work. Don't like it? Regulate it.

Again what you quote is precisely the definition you are seeking. Quite literally price gouging is simply another way to say "I think this price increase due to this abnormal market situation is unfair". It doesn't define how something should be considered unfair and it doesn't define what an abnormal market situation is rather it defines one's view on the situation. To try to debate price gouging on whether it is instead of why it is is therefore a bit misguided, as is comparing it to economic laws like supply and demand where it's completely orthogonal to how the market operates and instead focuses on why it does in bad situations.

In regards to "regulate it" price gouging laws are one type of regulation. Typically for government price gouging laws to kick in the government has to declare the situation an emergency but that doesn't limit what each person can consider price gouging.

Personally I don't think this is quite price gouging territory. The market situation is funky vs the normal situation for sure but it's not exactly a crisis driving people to buy eggs they have to get at inflated prices rather a problem lowering the supply of eggs which isn't enough to tick the box for me. Particularly at these prices. Others may disagree of course.

Their net (aka profit) was 8x year over year because their costs did not scale with revenue. Their 20% market share doesn't have anything to do with how their profit (as income minus costs) scales.

Based on info in the quarterly financial report, the revenue increase is 209%, not what the 109% the article says. Given their costs did not rise as fast as revenue, their profit margin this quarter was 32% over 8% the year before. However, it wasn't all roses as they indicate higher costs as well, example: "For the third quarter of fiscal 2023, feed costs per dozen were $0.679, a 20.8% increase compared with the third quarter of fiscal 2022."

  Item: before, after
  Egg: 1.61, 3.30
  Inc: 477.5, 997.5
  Net: 39.5, 323.2
  Margin: 8%, 32%

Max Bowman, chief financial officer of Cal-Maine Foods, added, “Our financial results for the quarter were led by net sales of $997.5 million compared with $477.5 million for the same period last year. Net income for the third quarter of fiscal 2023 was $323.2 million, or $6.62 per diluted share, compared with $39.5 million, or $0.81 per diluted share, for the third quarter of fiscal 2022. [0]

https://calmainefoods.gcs-web.com/node/13221/pdf

If you flip it to capturing revenue of competitors, instead of profit, then sure the profit increase is explainable by typical market rules but it's no longer backing an alternative hypothesis they were "reaping the benefits of that effort by capturing the profit that would have been distributed across other operators" you're back to the original hypothesis of the article "profits were increased" just now you've explained how (revenue increased faster than expenses for a given product volume). What price gouging asks is if that profit increase is ethical not how it's explained to have occured. That is price gouging is a question of opinions of policy, one of which could certainly include "anything that follows the expected market behavior is ethical".

To be clear I don't consider this price gouging personally, I'm just not seeing why this is an alternative hypothesis to price gouging instead of a take on what qualifies as unethical or not.

Agreed, I think based on the numbers the alternative hypothesis fails. I also see how your point regarding market share is germane to the alt hypo.

The one way the alt hypo might succeed is if competitors' costs increased dramatically and overall output did not decrease. Let's say they had to pay for irregular flock refreshing and intensive facility maintenance. Maybe this disrupted throughput but not overall output. I kind of want to dig into other egg producers financials now, but I have to avoid the rabbit hole I got caught in yesterday.

Windfall profits and periods of poor returns is the history of commodity producers - but the supply response usually takes years to respond (takes like 10 years to build a copper mine, and probably takes at least 6-12 months to increase egg production capacity)

In US it takes rather 7-10 years to go through permitting process for a copper or lithium mine. Then you start building.

For Rio Tinto in Arizona it was 26 years. [1]

[1] https://www.mining.com/web/timeline-rio-tintos-26-year-strug...

Windfall profits will be mega-huge when green revolutions starts rolling.

Push to shorten US mine permit review process gains steam [2]

[2] https://www.mining.com/web/push-to-shorten-us-mine-permit-re...

While shorting permit times is good, due diligence still has to be done. However a large project like a mine is still in the 5-10 year range, outside of permits. No new developments will have a material impact on supply if the EU etc are going for no combination vehicles by 2030.

It sounds like they just were very fortunate in that their supply of eggs were not affected by the avian flu which forced many other suppliers to have to destroy their eggs, creating a general shortage. While everyone was short on supply, this company was able to sell into that demand and wisely did so. So they had a nice windfall.

People need to realize just how optimized supply lines are today and any disruption to the logistics or end supply will have an effect. We have a fragile system but a system that also creates rock bottom prices when it isn’t disrupted.

Reminds me of semiconductor "shortage" where companies simply saw rising profits and decided this limited supply is the way forward. For example try buying any cheap small FPGA from mayor players. Xilinx (sorry, AMD) simply says Spartan 6 is not officially EOL, we just wont make them anymore in volume so forget $4 chips its $40 now :)

In Late Jan, some senators were calling for the FTC to investigate. No word back yet from what I've seen. https://thehill.com/policy/equilibrium-sustainability/382903...

No word back because they probably got their cut.

In Taiwan as well (mainly Taipei) right now there is a huge egg shortage due to bird flu and other reasons. Nearly no supermarkets have them. They get shipments but quickly sell out.

Yeah, and unfortunately supply shocks that result in price increases look an awful lot like price gouging.

But unless the government imposes pricing controls, this is just unfettered capitalism in action.

Could introducing a progressive tax on margins in strategic and consolidated sectors be a possible solution?

Average business margin is 8%, taxed at 21%, any more margin would be taxed at a higher rate, reaching a much higher rate on fat margins (like >30%).

Such thing should be limited to strategic sectors like basic food to limit price gouging/profiteering without byzantine controls

I think California just did something like this to gasoline products.

Companies will have rare/unique windfalls once in a while. I don't think it's really that outrageous.

People have rare windfalls too (one time job bonus, inheritance, etc.). Doesn't mean we should structure policy to make sure windfalls don't exist.

If they haven't had any cases of avian flu while others have had entire flocks wiped out, they've done something differently or got really freakin' lucky.

It'd be worth figuring out which and - if it's not luck - how to duplicate it elsewhere.

In this case it honestly seems like they have just gotten lucky.

Same could be said for companies like AMC, whose stock meme rally allowed them to pay off significant company debts through no achievement of their own.

It's just a rare/lucky windfall.

But the windfall seems it was directly related to their increase in prices. This is not the same as "inheritance" or something else seemingly unplanned. The company took an action to increase profits at the expense of consumers.

They increased price because everyone else did. They just happened to not be hit by the flu so their production was not hit.

everyone’s in a tizzy about the restrict act but no one cares about this… I don’t understand.

Outside HN, I hear a lot about egg prices and a little about the restrict act.

On HN, I hear a lot about the restrict act and a little about egg prices.

I'm sure your outside-HN experience is different from mine, but on HN the ratio seems to be exactly what I would expect. Regardless, people certainly care about both issues in both places.

Ah I see your problem, you thought this was Hatcher News.

Ideally, a few people will try to cash in on the high egg prices and more eggs will be produced. A few people won't be enough to remove government powers once they are granted.

If they didn't raise the prices I'd imagine someone further in the chain would reap same benefits; all it happened here is it seems that they were nearly unaffected by flu while their competition wasn't so lucky

I can’t help to think that eggs have become Giffen goods.

did we expect something else?

When corporations have pricing power they are legally obligated to the share holders to maximize profits.

I'm not advocating for or against.

It's unfortunate everyone agrees on the situation.

- profit seeking corps.

- limited competition due to market consolidation and limited supply chains.

- wage inflation due to limited workers because of aging population, limited immigration, low birth rates, skills gaps, geography gaps, .

They are not legally mandated to do that - that’s a group think developed largely by shareholders without morals.

The challenge is people are obviously split on whether that is moral Behavior or not. For example I think it is perfectly moral. Nobody is forcing me to buy eggs. I don't have a right to someone else's eggs. When I don't like the price, I buy a different protein. Over the last several months, I found myself buying a lot more pork, often for less than 90 cents a pound.

Except basic microeconomics demonstrates that profit is maximized when production is raised to the point where marginal revenue equals marginal cost. Semiconductor fabrication is one thing, because cost of entry is astronomical. But these are chickens we’re talking about.

We are probably just seeing the effects of egg producers trying to avoid a bullwhip effect where in two years we are drowning in eggs because the market over-responded. So, they limit investment in production increases today while enjoying the result of an exogenous supply shock on prices. Poof: record profits.

What else should we do? Price controls? They provably cause more harm than good. Force companies to invest in egg production? Ridiculous overreach. The market will adapt, people will reduce egg consumption (perhaps durably), and we can play out the counterfactual in 20 years to see if the egg industry shot itself in the foot or not.

> Except basic microeconomics demonstrates that profit is maximized when production is raised to the point where marginal revenue equals marginal cost.

Basic microeconomics demonstrates that this holds true _in a competitive market_. The record profits tell us that prices have come decoupled from marginal cost, from which we can conclude that major egg producers have been allowed to merge to a point such that the market is no longer competitive.

This is the short term during a market disruption where supply is constrained due to an avian flu outbreak. Long term prices will fall back to normal.

The difference between the cheap eggs of 2 years ago and the expensive eggs of today is not that too many egg companies merged.

Blaming all high prices on anticompetitive behavior is throwing the baby out with the bathwater.

> in a competitive market

Yes, hence my point about semiconductor fabs vs. hen cloacas.

You can’t just point to a single product type undergoing a price shock and declare the market has failed. Preferences are sticky, but substitutes abound. People will adjust their preferences, and egg consumption will drop. If prices stay high, other products will begin to take the place of eggs in various contexts. We aren’t entitled to cheap eggs, but neither are the producers guaranteed record profits beyond a quarter or two. This too shall pass.

Preference for eggs is remarkably sticky; there effectively is no substitute good for most uses.

Only considering market forces and saying the market will fix itself is a shortsighted argument. We live in a society and the market does not factor in societal impacts in terms of the "greatest good". Markets need a balancing counter force to make sure eggs are not only available to the rich and the poor are exposed to malnutrition. I say this because in the US we have this dominant idea that there is nothing better than not interfering with the market while forgetting that the market is only valuable to society if it serves our greater good. The statement that price controls do more harm than good is not true in a general sense. When society chips in to save banks no one seems to have a problem with that, try to make eggs affordable is blatant overreach.

> What else should we do? Price controls?

Many modern, western countries have supply management policies in place to help steady commodities markets, e.g. Canadian dairy management.

Heck, US farm subsidies exist specifically for this reason: to help support producers when markets soften. There's just no policies in place to moderate market behaviour when prices swing up (privatize the profits, socialize the losses, baby!)

There is a middle ground between unfettered, free market neoliberalism and full blown state control. Unfortunately, the kind of thought-limiting rhetoric you're demonstrating here shuts down discussions before they get started.

It's really not productive to try and trace this back to an obligation to maximize profits. Firstly, it's not true according to the Supreme Court. And secondly, even we accept that it's something corporations should do or are doing, there are a million ways to judge what would be the maximally profitable strategy. You could say that they should jack up prices to maximize profits, but that's just one strategy for maximizing profits. They could lower prices in order to gain customer loyalty for example instead.

In this case, the limited competition isn't due to market consolidation, it's due to a disease wiping out a load of the supply.

To paraphrase Russell Brand: we have created a world where it's most profitable to have an ongoing crisis forever.

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