Compassion by the Pound

Over at Freakonomics.com, James McWilliams graciously referred to the (in his words "superb") book Bailey Norwood and I wrote last year, Compassion by the Pound​.

​The question he raises in his post is whether it is profitable for farmers to adopt higher animal welfare standards.  There is a common  belief in the agricultural community that happy animals are profitable animals.  And that is partly true.  But as we argued in our book, and in more detail in this recent journal article  entitled Animal Welfare Economics, farmers aren't necessarily interested in maximizing individual animal profitability but the profitability of a group of animals housed on a fix amount of land.  When the goal is to maximize the total profit calculated over all animals, we show that a producer will sacrifice some individual animal welfare to achieve higher group output.  The intuition is straightforward.  A larger group of slightly sadder animals can produce more output than can a smaller group of slightly happier animals.   

The Price of Happy Hens

​After Californians passed Prop 2 in 2008 banning egg production from so-called battery cage systems, there has been much speculation about the impacts on egg prices in California once the law is fully enacted.  It is said that politics makes strange bedfellows, and that is certainly true of the agreement struck between the United Egg Producers (UEP) and the Humane Society of the Unites States (HSUS) to extend Prop 2 like legislation for egg laying hens across the US (we speculate here on why such an agreement was reached for eggs but not pork). 

Although Congress has not yet given the agreement the force of law, prospects of likely passage have raised further questions about the impacts on the prices of everything from your morning omelet to your evening Chocolate Soufflé.  Given the ubiquity of eggs in our diet (they are in foods as diverse as mayonnaise to chef’s salad), there has particular concern about the prices paid by the poor. 

Frankly, I don’t know exactly what will happen to prices and let me tell you why. 

We published a paper in 2010 in the Journal of Agricultural and Resource Economics containing the graph at the bottom of the post which plots the average price of three types of eggs ($/egg) paid by consumers across the US from 2004 to 2008 as determined by grocery store scanner data.

Over this time period, organic eggs sold at an average premium of 142% and cage free sold at an average premium of 86% relative to conventional eggs.  

Yet, a study led by Dan Sumner at UC Davis suggests the costs of producing cage free eggs are only about 25% higher than the costs of producing conventional eggs. 

So what explains the discrepancy between the roughly 25% cost difference and the 86% retail price difference between conventional and cage free?  It could be that, given the lower volume of cage free sold, the marketing and shelf-space costs of cage free are substantially higher than conventional.  Alternatively, producers and retailers may be able to use the cage-free label as a mechanism to price discriminate and charge less-price-sensitive egg consumers more for “boutique” eggs. 

All this begs the question: what will happen if the UEP-HSUS agreement becomes law?  Will the price of cage free stay where it (or perhaps even rise) or will prices fall as cage free becomes the new conventional?  If the marketing cost explanation is correct, one would expect the prices of cage free to fall closer to the level of current conventional prices (only about 25% higher than current conventional prices).  If the price-discrimination explanation is correct, cage free prices will also fall but the relative premium for “niche” eggs like organic could grow.  Either way, it seems likely that the agreement will lead to lower prices for cage-free eggs albeit at higher levels than current conventional egg prices.  Overall egg prices will be higher, and as a result, overall industry sales will be lower relative to the current situation.

In our recent book on the animal welfare, we project the long-run impacts (after the industry has had time to adjust and invest in new housing systems) are that consumers would be about $1.8 billion/year worse off and producers would be about $187 million/year worse off than they were before a ban on batter cages.  The short-run losses are much higher.