It really feels like 2022 has been the year of the shortage. Just in the last few months, I've posted about shortages of French mustard, CO2 for beer making, after-hours veterinarian services, dungeon masters, and Kobe beef croquettes (although this one was purposeful on the part of the seller). And now eggs, as reported by the New Zealand Herald earlier this week:
Supermarket shelves are bare of eggs while others are limiting the number of cartons customers can buy during a drop in supply...
A ban on battery-caged hens, announced in 2012, comes into effect on Saturday and over the past few years the deadline has caused turmoil in the industry.
Egg Producers Federation executive director Michael Brooks said more than 75 per cent of chicken farmers have had to change their farming methods or their career because of the ban.
“The supermarkets’ announcement to refuse colony cage eggs, the end of the cage system, plus Covid, plus the grain cost rising because of the Ukraine war have all come together,” he said.
“It’s led to a drop of about 600,000 or 700,000 hens in the commercial flock. That’s a lot of eggs that aren’t available.”...
Brooks predicted egg prices would also rise as it has cost farmers millions to change their practices.
When the Government announced the battery cage ban, it told farmers they would have to transition to colony, barn or free-range farming.
But in 2019, Foodstuffs said they would no longer accept colony eggs and aims to be fully cage-free by 2027 either, which Brooks described as a “bombshell”.
“That put real confusion into the industry. A number of people - in fact a third of the industry - had already gone to colony eggs. But to go free range, they’d have to buy a whole new farm and the barn system was one we hardly knew in New Zealand, so a lot of farmers were really thrown.”
The funny thing is, this is almost exactly as predicted in 2019, when the ban on cage eggs was announced. Let's reprise what I said would happen then, and how it applies again now, but with bans on both cage eggs and colony eggs.
Consider the market for eggs, as shown in the diagram below. Egg producers are facing increasing production costs, because of the need to move from cage egg production and colony egg production for free range egg production. When costs of production increase, that results in a decrease in supply, shown by the supply curve shifting up and to the left, from S0 to S1. If egg prices were to remain at the original equilibrium price (P0), then the quantity of eggs demanded (Q0) would exceed the quantity of eggs supplied (QS) at that price, because egg producers are only willing to produce QS eggs at the price of P0, after the supply curve shifts. There would be a shortage of eggs, as we are observing in the market.
Shortages don't tend to last forever though. At least, not if the market is allowed to adjust. How would the egg market adjust to the shortage? The price of eggs would increase. To see why, consider what happens when there is a shortage. Some buyers, who are willing to pay the market price (P0), are missing out on eggs. Some of them will find a willing seller, and offer the seller a little bit more, in order to avoid missing out. In other words, buyers bid up the price. The result is that the price increases, until the price is restored to equilibrium, at the new (higher) equilibrium price of P1. At the new equilibrium price of P1, the quantity of eggs demanded is exactly equal to the quantity of eggs supplied (both are equal to Q1). We can say that the market clears. There is no longer a shortage.
In the meantime though, there is a shortage of eggs. As many economists would tell you, the reason for the shortage of eggs is not that there is not enough eggs, but rather that the price of eggs has not yet adjusted sufficiently. Expect your eggs to cost you more in the future.
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