The Implications of Interstate Commerce Restrictions on Retail Egg and Pork Prices and Demand Harry M. Kaiser Gellert Family Professor Charles H. Dyson School of Applied Economics and Management Cornell University January 29, 2016 Abstract Massachusetts will likely vote on an initiative requiring all pork and poultry products sold in the state to be produced without the use of gestation stalls or cages, which will almost certainly raise retail prices for these products to consumers in the state. This analysis examines how an almost identical law regulating egg production in California impacted retail egg prices. Using data from Nielsen Perishables Group and a “difference-in-difference” statistical model from Midan Marketing (2015), we find that retail egg prices in California increased by $0.49 per dozen, or almost 18%, due solely to the new state egg law. This increase in egg prices was 13.5 times higher than the inflation-rate for all food and 35 times higher than the overall inflation rate. Based on average per capita egg consumption in the United States of 21.5 dozen per year (http://www.foodnavigator-usa.com/Markets/US-egg-consumption-highest-it-s-been-in-7-years) and the average retail price (Nielsen Perishables Group), California consumers are spending almost $14 per person more on eggs or $70 per year for a household of five due to the law. This increase in consumer expenditures may not be that severe for the average household in California, but the same is not true for the poorest households in the state. Recent research by DiPeitre (2012) argues that, if applied to the total United States population, the resulting increase in egg prices disproportionately harms lower income households; primarily African American and Hispanic families who are younger, headed by a female, and located in the south and southwestern United States. Moreover, poor people often live in urban areas where food prices are significantly higher than in other areas. Consequently, the increase in egg prices due to the new egg law is disproportionately higher for these households than the general population. In sum, the proposed Massachusetts ballot initiative, if passed, is likely to increase consumer prices for pork and egg products sold in Massachusetts, which may result in consumers having less financial resources for spending on other needs. These potential consequences would not only affect consumers’ purchasing power for these and other products, but could also have an impact on the ability of some of the poorer consumers to maintain a healthy and adequate diet as two important and affordable protein sources will now cost more. The Implications of Interstate Commerce Restrictions on Retail Egg and Pork Prices and Demand Massachusetts is considering a ballot initiative requiring all pork and poultry products sold in the state to be produced without the use of gestation stalls or cages. This “cage-free” law, which will likely be voted on in a 2016 referendum in the state, would likely raise consumer retail pork and egg/poultry prices. Should this ballot initiative be enacted in Massachusetts, it would likely raise the costs of hog and poultry production for pork and egg products destine to Massachusetts consumers. The magnitude of increase in retail prices is difficult to determine before the law takes effect. However, an almost identical law was enacted in California that requires all eggs sold in the state to be produced in a cage-free environment. Specifically, the California egg law bans the sale of eggs from chickens in small “battery cages” and requires the space for every egg laying chicken in the state to be increased by almost 70%. The California egg law took effect one year ago on January 1, 2015. Thus, California consumers have had a full year of experience with the impacts of this law. The purpose of this analysis is to discuss the potential impact of the pending Massachusetts law on consumer pork prices by examining how the California egg law impacted retail prices eggs in California. While the egg and hog sectors are different from one another, this analysis does provide useful insight on the potential consequences of cage-free-type laws on egg and pork prices. The analysis is based on retail egg price data in California versus the rest of the United States for the year prior to the law going into effect (2014) and the first 10 months after the law went into effect (January through October, 2015), which were the most recent data available at the time of the analysis. These data were obtained from the Nielsen Perishables Group and analyzed by Midan Marketing (2015), who conducted a “difference-in-difference” (DID) analysis of the law by comparing retail egg prices between California and the United States before and after the law took effect. The advantage of using a DID framework is that other factors that could effect retail price changes before and after the law took effect are differenced out, and what is left is solely attributable to the impact of the law. This method was necessary because there was an outbreak of avian influenza in late 2014 and 2015, which impacted egg production nation-wide including California. The analysis by Midan Marketing used only one-dozen egg carton sizes in order to standardize the results. The data included weekly store purchases of eggs from retailers (grocery stores) across the United States for most traditional supermarkets as well as Wal-Mart, Super Target, and Sam’s Club, but excluded fresh-format chains like Trader Joe’s, Sprouts, and Whole Foods as well as other club stores like Costco and BJs (data from these formats are not reported to Nielsen for use in their database).The estimated coverage of retail egg sales is 67% of the entire grocery store market, which is reasonable for the before and after analysis of the California law’s impact on retail egg prices. Midan Marketing’s analysis of the Nielsen data found that egg prices in California increased by $1.05 per dozen (or 37.8%) when comparing the first 10 months of 2014 to the first 10 months of 2015. Egg prices also increased in the rest of the United States by $0.56 (or 27.4%) over this period, which was probably mainly due to the avian influenza outbreak which negatively impacted production. Hence, differencing out the rest of the U.S. price increase from the California price increase, this means that the California law raised egg prices in the state by $0.49 per dozen, or almost 18% in 2015. To put this increase into perspective, over the same period the Consumer Price Index for All Food increased by 1.3% and the Consumer Price Index for All Items increased by 0.5%. In other words, the increase in egg prices as a result of the California egg law was 13.5 times higher than the inflation-rate for all food and 35 times higher than the overall inflation rate. What does this mean for egg demand? Economists measure price sensitivity of demand by what is called the “price elasticity” of demand, which measures the percentage change in quantity demanded given a 1% change in price. Kaiser (2006) found that U.S. consumers are not very sensitive to changes in egg prices. Specifically, he found that when holding constant all other egg demand determinants, a 10% increase (or decrease) in egg prices would lead to a mere 0.2% decrease (increase) in quantity demanded. In other words, the average consumer barely pays attention to the price of eggs when making her purchase decision. Sumner et al. (2010) report somewhat higher elasticities in the literature ranging from–0.15 to –0.30. Regardless of study, the demand for eggs is still very inelastic. Applying Kaiser’s (2006) elasticity estimate to the 18% price increase due to the California law suggests that the average decrease in quantity demanded would only be 0.41%. There are at least two plausible reasons why egg demand is so highly price inelastic. First, eggs do not have a lot of substitutes, so when the price increases, there are not a lot of alternatives to using eggs. For example, there are not a lot of good substitutes for eggs in bakery products. Second, eggs are a very inexpensive source of protein and comprise a relatively tiny share of the budget of most households’ except for poorer families, which is discussed below. Purchasing behavior for most people is not very sensitive to price changes for products that represent a small portion of their income. Midan Marketing looked at what happened to egg sales volume from 2014 to 2015. Surprisingly, even though the average price increased by a whopping 37.8% in 2015 in California, sales volume actually increased by 4.2% in California, while decreasing by 0.6% for the rest of the United States. This seemingly counter-intuitive result for California is most likely due to a favorable shift in some of other (non-egg price) egg demand drivers coupled with the extremely inelastic demand for eggs. For example, the Census Bureau reports that per capita income increased by almost 6% in California over the first three quarters of 2015 compared with only a 3% increase for the rest of the United States. Kaiser (2006) found that every 10% increase in per capita income increased egg demand by about 2%. Therefore, this and perhaps other changes in egg demand drivers may be accounting for the increase in demand rather than the price increase. According to the Midan Marketing analysis, total dollar sales of eggs increased by 43.5% in California from 2014 to 2015, while egg expenditures increased by 26.7% in the rest of the United States over this time period. Differencing out the rest of the United States, this implies that California consumers will spend 16.8% more on eggs due to the new state egg law. Based on average per capita consumption of 21.5 dozen per year and an average price in California of $3.83 per dozen, California consumers are spending almost $14 per person more on eggs due to the law. For a family of five, that works out to about $70 per year. This increase in consumer expenditures may not be that severe for the average household in California, but the same is not true for the poorest households in the state. DiPeitre (2012) discusses the distributional impacts of California’s new egg law arguing that, if applied to the total United States population, the resulting increase in egg prices disproportionately harms lower income households; primarily African American and Hispanic families who are younger, headed by a female, and located in the south and southwestern United States. Likewise, Allender and Richards (2010) find that larger households and/or households with limited means are most likely to be affected by this increase in egg prices. Allender and Richards (2010) estimate that the loss in consumer welfare totals $106 million due to this law. Furthermore, DiPeitre (2012) argues that since egg demand is so highly price inelastic, the increase in retail egg prices could cause poorer households to reduce purchases of other essential items rather than reduce purchase of eggs, which would have negative health consequences. For instance, poor families already consume fewer fruits and vegetables than more financially stable households, and could purchase even less of these healthy products due to the rise in egg prices. DiPeitre (2012) also points out that poor people often live in urban areas where food prices are significantly higher than in other areas. Consequently, the increase in egg prices due to the new egg law is disproportionately higher for these households than the general population. Another consequence of the California egg law, as well as the proposed Massachusetts law, is its passage will have the impact of reducing the choice of food products for consumers. Without the law, consumers have the choice to buy conventionally produced food products or can purchase cage-free products at higher prices. However, the enactment of cage-free laws takes away lowerpriced products produced with currently conventional technology. Thus, an unintended and negative consequence of such laws is it takes choices away from consumers. Further, because Massachusetts is a deficit state in terms of production of pork and eggs, meaning that a vast majority of these products are produced in other states that do not have restrictions imposed on production practices, Massachusetts consumers may be further limited in choices of pork and egg products should this ballot language be enacted. The experience with the new California egg law clearly shows that retail egg prices have risen significantly because of it. An almost 18% increase in retail prices due solely to the law is substantial especially when considering that food and general prices barely increased at all over the same time period. But what about pork prices should the proposed Massachusetts proposition pass in 2016? This analysis, of course, does not enable us to claim that pork prices would increase by 18% if the Massachusetts law is enacted. However, the sheer magnitude of increase in retail egg prices due to the California egg law strongly suggests that pork prices will almost certainly increase should Massachusetts enact the cage-free law. And, even if the magnitude is not as severe as with egg prices in California, pork represents a higher proportion of the typical consumer’s food budget. Lusk (2014) estimates that per capita pork expenditures are about 2.2 times higher than egg expenditures. Consequently, even if the price increases for pork due to passage of the Massachusetts ballot initiative are less than 18%, it will still represent a sizeable increase in consumer prices and thus, consumer expenditures, for pork products sold in Massachusetts. This sizeable increase for consumer pork costs would have the potential to negatively impact lower income households as similarly discussed by DiPeitre (2012). For example, according to the Massachusetts Budget and Policy Center, in 2014-15, 44% of families in Massachusetts were participants in the free and reduced price lunch program, compared to 36% for the 2010-11 year. With 44% of Massachusetts families participating in the free and reduced school lunch program, it is reasonable to conclude that an increase for pork and egg prices may have a negative impact on the families already struggling economically to provide proper nutrition for their children. In summary, the proposed Massachusetts ballot initiative, if passed, is likely to increase consumer prices for pork and egg products sold in Massachusetts, which may result in consumers having less financial resources for spending on other needs. The likely increases also have a potential to increase the consumer cost for food items which contain pork or egg products as an ingredient. These potential consequences would not only affect consumers’ purchasing power for these and other products, but could also have an impact on the ability of some of the poorer consumers to maintain a healthy and adequate diet as two important and affordable protein sources will now cost more. Sources Allender, William J. and Timothy J. Richards. “Consumer Impact of Animal Welfare Regulation in the California Poultry Industry.” Journal of Agricultural and Resource Economics 35(2010):424–442 DiPeitre, Dennis. “Economic Justice and the Price of Eggs.” Working Paper, 2012. Food Navigator. http://www.foodnavigator-usa.com/Markets/US-egg-consumption-highest-it-sbeen-in-7-years Lusk, Jayson. http://jaysonlusk.com/blog/2014/3/28/meat-expenditure-shares. Midan Marketing. “Analysis of the Impact of New Cage-Free Egg Law on Egg Sales in California,” December 2015. Nielsen/Perishables Group. Data on retail egg sales in California versus the remainder of the U.S. for weeks ending November 10, 2012 through October 31, 2015.