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Effect of New California Laws on Egg Prices

A number of recent articles have reported on California's new egg law.  Here's a summary of what's happening if you're unaware:

“To recap, in 2008 California voters passed Prop 2 which essentially outlawed the use of “battery” cages in egg production in the state. California producers, fearful they would be put out of business by cheaper eggs from out of state, then secured passage of a state law in 2010 that also banned grocery stores from selling eggs that didn’t meet the new California standard. Several state attorney generals challenged the law, on the grounds that it violated the interstate commerce clause, but their initial attempt was unsuccessful.

In any event, all this finally went down on January 1, 2015. ”

Now that the new law is in place, there has been much interest in the effects on California egg prices.  I've seen a large number of articles written on the topic either before the law went into effect on Jan 1 which speculated on the potential change in egg prices or articles reporting on the effects after the fact.  I previously showed a picture taken in a grocery store that one of my students from California sent me suggesting that California consumers were taking note of rising prices.

Most of what I've read in these stories, however, is anecdotal.  They often only indicate what happened to egg prices in California without comparing to prices elsewhere (how to we know there isn't an overall price increase in every location due to some other factor besides the new law?).  As a result it has been difficult to get a sense of whether the increase in egg prices in California is due to the new law or some other factor.

To delve a bit into the issue, I was able to locate some data from the USDA, Agricultural Marketing Service (AMS).  Almost every day since the first of January, the AMS has released the National Shell Egg Index Price Report, which reports egg prices nationally and in California. Because this is a new report in 2015, I had to contact the AMS to get the data going back into 2014. To make things simple, I only focus on the prices of large eggs and the data are reported in cents per dozen.  

Here's a graph of the two price series over time, with the bold black vertical line indicating when the new CA law went into place. 

The first thing to note is that beginning in November, egg prices started increasing in California, but they were also increasing in the rest of the US.  Thus, attributing the November price increase to the new CA law (as many news stories did) seems misplaced.  

However, toward the end of November, and especially after the 1st of the year, the two price series begin to diverge.  After almost a year of moving up and down in tandem, something clearly happened around the first of the year that caused a divergence, and that "something" is almost certainly the new CA law.

One way economists try to sort out the effects of a policy such as this is to calculate a "difference in difference."  The reported price premium for CA eggs may be due to the way the AMS is measuring these data relative to the National price series, making us skeptical of the reported premium at any point in time.  However, we can be more confident in how this premium changes over time, because a "difference in difference" nets out these measurement effects, among other factors.  

Before Jan 1, 2015, the average price difference between the California price series and the National price series was 17.54 cents/dozen.  After Jan 1, the California premium over National prices increased 10 fold to 175.62 cents/dozen.  Thus, as of the date of this writing, it appears the new CA law has caused a 175.62-17.54 = 158.08 cent/dozen increase in the price of eggs in CA.  Given that the average price of large eggs in California in 2014 was 131.05 cent/dozen, we can thus say that the new law caused a (158.08/131.05)*100 = 120.6% increase in the price of California eggs.  

Now, as we can see from the figure above, the price series appears to be coming back together at the beginning of February, so we don't yet know how much of this price increase is due to a temporary shock (partially resulting from CA producers reducing flock size) and how much is a long-term price increase due to increased marginal costs of producing eggs.  The only way to answer that question is to wait and see what happens to egg prices.  

Food Stamp Restrictions

This article in the USA Today discusses efforts to better track the spending of people who receive SNAP benefits (aka "food stamps").  It's not necessarily a bad idea, though I wonder: what is the ultimate purpose of the tracking?  

I would venture to guess that such tracking will reveal that SNAP recipients do not eat as healthily as some would like.  Indeed, the USA Today article quotes Michele Simon as saying

“As currently designed, SNAP is not promoting public health”

My suspicion is that the motivation for tracking SNAP purchases is to provide justification for adding new restrictions on SNAP benefits.  It is an idea that is popular with many on the left and the right.  In a poll I conducted last year, almost 70% of US citizens support a policy that would "prohibit purchases of certain food, like sugared soda, with food stamp benefits." That same survey showed that over 80% of respondents favored a policy that would "provide funding so that food stamps can be used to purchase foods at farmers markets."  There have been real world efforts to subsidize fruit and vegetable purchases when using SNAP (see this study for one analysis of the efficacy of such a proposal). 

So, what we're seeing is a shift from seeing SNAP as a tool to help with food insecurity (or hunger) to one that attempts to promote certain dietary patterns, presumably to promote public health.  Ironically, this comes about as news stories are revealing a doubling in the number of children receiving food assistance in recent years, and research showing that the prevalence of food insecurity in the US remains high.

I have mixed feelings about the efforts to scrutinize SNAP spending.  On the one hand, it is a public program funded with tax dollars, and it seems taxpayers should expect some form of accountability.  On the other hand, we don't know a whole lot about the costs and benefits of SNAP restrictions or whether there will be a trade off between hunger-fighting and healthy-promoting goals.  

One of the things that bugs me is the lack of recognition that  proposed SNAP restrictions are likely to be totally ineffectual.  Take, for example, a policy that would ban using SNAP dollars to purchase soda.  That policy might make us feel good, but it isn't likely to have any effect on the amount of soda people drink.  Why?  Because people can re-allocate their budget to achieve the same bundle of food regardless of whether the restriction is in place.

An example might help illustrate.  Suppose you receive $130 in SNAP benefits each month (this is the about average monthly amount received per recipient person in the US), and you spend another $200 from your own pocket on food each month (for a total of $130 + $200 = $320).  Now, let's suppose you take one big shopping trip  to the grocery store each month, and your cart is piled up with food (including a case of Coke costing $10).  You've put just enough food in the cart to consume your entire budget of $320.  Now, you know that your SNAP benefits can't cover the entire amount.  So, what do you do?  You pull out that little plastic barrier, put it on the convener belt, and put $130 on one side (to be paid for with the SNAP benefits on the EBT card) and put $200 on the other side (to be paid for with your cash).  

Now, let's suppose we have a ban on buying soda with SNAP.  What happens?  You simply pick up the $10 case of Coke that was on the SNAP side of the barrier and move it to the other side of the plastic barrier.  But, now you've got an extra $10 you can spend in SNAP benefits (and now you're also short $10 cash).  All you've got to do is find another item on the cash side of the barrier worth $10, pick it up and move to the SNAP side, and your done.  The end result is the same regardless of whether the SNAP restriction is in place or not: you spend $320 and drink Coke.  The only difference is where the Coke is put on the conveyor belt.  This is an insight that's been known since at least the 1940s (see this paper by Herman Southworth), and yet it is one I rarely see mentioned discussion about attempts to improve health by restricting SNAP purchases.

What about policies that would subsidize fruit and vegetable consumption?  First, we should recognize that this policy is unlikely to reduce prevalence of obesity.  Second, note that this policy is akin to increasing funding for SNAP, but in a restrictive way.  We're giving people more money, but with strings attached.  We're being paternalistic, failing to respect how people want to spend these dollars.  It reminds me of this article from the Onion  with the heading, "Woman a leading authority on what shouldn't be in poor people's grocery carts."  

 

More on GMO wheat

A couple weeks ago, the St. Louis Post-Dispatch ran a story on GMO wheat that's been picked up by several other news outlets.

This is a controversial topic, even among some farm groups, and it is one I've touched on several times in the past (e.g., see here or here).

In the most recent article, I'm identified as a "a supporter of GMO wheat."  I can understand why the reporter would write that, but I think it is better to say that I'm a supporter of reasonable regulation and producer choice.  

It wouldn't bother me if a seed company or University put out a GMO wheat variety that didn't pass the market test (that no one wanted to buy).  But, what is troubling is the position that wheat producers cannot have access to a perfectly safe technology while canola, soy, and corn producers can.  Yes, there are some complicated trade issues involved, and there are fears about market power, but I see little reason these issues can't be sorted out in the marketplace, as it has with these other commodities.

By "reasonable regulation", what I mean is that we've created this strange climate around GMOs that both make the regulatory costs of introducing a new variety quite high and raise the hackles of some of our trading partners.  But, I'm not sure it's a very reasonable climate.  For example, I'll note that some of my excellent colleagues at Oklahoma State have released a new wheat variety that is herbicide resistant but that is not, technically, a GMO.  However, as would be the case with a GMO, producers are not allowed to save and replant the seed because the variety is protected by a patent.  In short, the wheat breeders have delivered almost everything one would expect in a GMO, except it isn't technically a GMO.  

What that tells me is that it's often silly to focus on the tool (i.e., whether a certain genetic technique was used) rather than the outcome.  But, as the example also shows, when artificial barriers to innovation and trade are introduced, entrepreneurs will find a way around it if the demand is there.  

P.S. On the topic of wheat genetics, note the recent article forthcoming in the American Journal of Agricultural Economics by Jessie Tack, Andy Barkley, and Lanier Nalley.  They show that yield potentials have been increasing steadily over time, but the gap between potential yield and actual farm yield has also been increasing over time.  They attribute the gap to on-farm management/production decisions.