Egg marketers await beginning of new regulations


Issue Date: December 3, 2014
By Ching Lee

Whether there will be a shortage of eggs or a price increase remains uncertain at this point, but one thing is certain: When California rings in the New Year, eggs sold in the state will have to comply with new regulations.

Proposition 2, which affects how California egg farmers house their hens, takes effect on Jan. 1. Approved by voters in 2008, the law prohibits specific farm animals from being confined in a way that prevents them from being able to turn around, lie down, stand up and fully extend their limbs.

At the same time, another new law, Assembly Bill 1437, which passed in 2010 and requires out-of-state producers who sell shell eggs in California to comply with Proposition 2, also takes effect.

Since its passage, Proposition 2 has had profound impacts on the state's egg farmers, as some of them either took the plunge to retool their production facilities at significant financial expense to comply with the law, or decided to exit the business altogether.

But the law's impact on consumers, in terms of what will be felt at supermarkets and restaurants that sell eggs, has been less clear.

Ronald Fong, president and CEO of the California Grocers Association, said grocery stores are "not overly concerned about having eggs on the shelf come Jan. 1." Retailers, he said, rely heavily on egg distributors to supply their stores, and for them, eggs represent one of myriad products they sell.

But he acknowledged egg distributors tend to have different opinions on how the new laws will affect the supply of eggs in the state. Some say there will be a shortage, because farmers have had to reduce their flock sizes in order to comply with new spacing requirements, while others say they'll be able to purchase sufficient numbers of compliant eggs from out of state, he said.

Another factor adding to the uncertainty is an ongoing lawsuit involving six states—Missouri, Alabama, Nebraska, Oklahoma, Iowa and Kentucky—that have challenged California's ban on out-of-state eggs that don't comply with Proposition 2. The suit claims the California egg law violates the interstate commerce clause of the U.S. Constitution.

Ken Klippen, spokesman for the National Association of Egg Farmers, which opposes the California egg law, belongs to the camp that says Californians will see some egg shortages and higher prices next year. He said while it is uncertain how many out-of-state producers have made the necessary changes to comply with Proposition 2, some started the process after passage of AB 1437, as California remains the nation's largest egg market and those producers want to continue selling eggs here.

One of those producers, Klippen said, has built a complex that houses 2 million birds on the Arizona border and will be shipping eggs to California. But many others will not be overhauling their operations, he added.

"Just the sheer cost of doing that puts it beyond the reach of many farmers that I represent," he said. "They just can't afford to make those kinds of adjustments."

Because egg production is inelastic, Klippen said, farmers buy and sell eggs to one another all the time, often through an exchange system such as Egg Clearinghouse Inc.—a sort of Wall Street for eggs—in order to continue supplying their markets. But with implementation of Proposition 2, some of them will not be able to sell to those shipping eggs into California if those eggs do not comply, he said.

Fong said it may be that other states will feel the impact of Proposition 2 down the road "if people are climbing over themselves to do business with California because of our marketplace here," thereby reducing egg shipments to other states.

California Farm Bureau Federation Administrator Rich Matteis said the activity by out-of-state egg farmers points out an irony about Proposition 2.

"At a time when so many advocates urge people to 'buy local,' it looks like this law could very well result in Californians having to rely on more eggs from out of state, because of insufficient local supply of compliant eggs to meet the demand," Matteis said.

Fong said he doesn't think California consumers will see the price of eggs increase right away, as there will be "plenty of supply here in the first few months." If it later turns out that there won't be enough eggs to meet the state's demand, any price uptick likely will not be felt until a few months into 2015, he added.

Matthew Sutton, vice president of government affairs and public policy for the California Restaurant Association, said there is an expectation that egg prices will go up, but whether restaurants will respond by raising prices of menu items that use eggs will be on a case-by-case basis.

"The more you are dependent on eggs for your menu items, the more any cost increase in eggs will impact you," he said.

The new laws only apply to the sale of shell eggs and do not affect products such as cooked eggs and liquid eggs. Even so, Sutton said he does not expect restaurants will make a big move toward using those other products, but he noted they have had to work with different and more suppliers to ensure they will have enough eggs that comply with Proposition 2.

Derar Zawaydeh, owner of Crepeville restaurants in Sacramento and Davis, said he wasn't even aware that Proposition 2 was taking effect in less than a month. But he said he is concerned about a potential surge in egg prices and how that could cut into his sales and profits, as almost everything on his menu uses eggs. Depending on how much the increase will be, he said, he will likely have to raise his prices.

"We are dependent on eggs. Other restaurants are not, so that may not affect them," Zawaydeh said. "It kind of puts me at a disadvantage. So that is also worrisome."

Paul Cahill, president of Farm Fresh Foods, an egg distributor in Santa Ana, said he spoke to his main suppliers in Iowa two months ago about the rollout of Proposition 2 and they assured him that they are "ready to go" and will have enough eggs that meet the California standard. The bulk of his customers are bakeries, restaurants and other egg distributors.

He noted that egg prices have already "gone through the roof" in recent weeks due to higher demand during the holiday season.

Cahill said while he has not asked egg producers whether they will be raising prices due to Proposition 2, he said "it doesn't take a genius to figure out it will cost us, eventually."

"You can't have fewer chickens on the farm and think your costs will stay the same," he said. "But then again, one thing about the egg business: It's never really driven by what it costs. The egg market is about supply and demand—and the demand for eggs right now far outweighs supply."

(Ching Lee is an assistant editor of Ag Alert. She may be contacted at clee@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.