Doug read last week’s piece on the price of eggs and sent us these great thoughts on it. Figuring out how to price your product is not easy. We hope this exchange sparks more great conversation and helps you with that problem.
What struck me when I read last week’s article “Charge More For Your Eggs! Your Neighbors Will Thank You” was this:
“If we could get everyone to raise their prices to reflect the true cost of their particular production model, we could level the playing field and support those producers that are counting on those dollars to keep them viable. Those one or two more dollars are not going to break the bank of the consumer but the added 20 or 50 dollars a week would be a real boon to a producer who may already be struggling to make ends meet.”
There are three problems with this. First, it suggests collusion to raise prices (who really knows what a true cost of a production model is?) which, in pretty much all situations, is better known as “price-fixing.” It’s price-fixing whether it’s done by beer companies and their distributors or by egg growers on country lanes. Technically it is a crime. The FTC doesn’t care for it:
“A plain agreement among competitors to fix prices is almost always illegal, whether prices are fixed at a minimum, maximum, or within some range. Illegal price fixing occurs whenever two or more competitors agree to take actions that have the effect of raising, lowering or stabilizing the price of any product or service without any legitimate justification.” (FTC website)
To be honest, though, I’m pretty sure the FTC doesn’t care about the egg producers of Benton County Oregon.
Second, it violates basic economics. Market price is never set by “reflecting the true cost” of production. It is set by finding the point where production meets demand. The market and the consumer do not know or care about the cost of production, they care about the price of the item. They have an internal value they put on the item (what economists might call the “util value” of the item) and, when the cash price is less than the util value, they buy. If the cash price of farm stand eggs is way below the util value, they will buy some more, but not infinitely more. The “util surplus” they achieve (“what a bargain, farm eggs for $3 or $4 a dozen!”) goes into their psychic and real bank accounts and they feel and are (a bit) richer for the experience. If the cash price of eggs is at or above the util value they will rue the display (“Man, that’s spendy. $7 for eggs at the stand.”) and not buy. This is true even if they will pay $7 or $8 for “farm fresh eggs” from the fancy grocery store.
Third, collusion simply doesn’t and won’t work. Let’s say twenty farmers in Lane County who sell 20 dozen eggs each week from their roadside stands agree to raise their dozen pricing to $6/per dozen. Invariably one farmer (maybe the furthest out, or the one with the shabbiest stand) figures out that if 19 are selling at $6/per then he won’t have any problem selling his inventory at $5 and maybe in half a day. So, in any real life collusion where “enforcement” of the fixing is difficult, someone will free-ride (“pay full price for 2 dozen eggs and get $2 worth of tomatoes free,” or a punch card which gives the customer every 5th or 6th dozen ‘free’, etc.) and leave the price-raisers to pay in the end.
In addition to being illegal, uneconomic and unworkable (which should kill any approach at the birthing) this actually ignores the best way to optimize almost any form of agriculture, which is to understand the costs of the inputs (and reduce them wherever possible, especially if you can substitute the free labor of animals for human labor) while actually understanding the real returns and not simply the cash flow returns. And I don’t mean fresh air and idyllic moon rises over the hay barn, although I like those, too. Let me explain.
I am new at this, having only acquired a 335-acre ranch 18 months ago (it had been hayed for 20 years) in Eugene, Oregon, a nice valley which had been fertilized, hayed and compacted. I began grazing last year. I graze 100 head of cattle for a large cattle operation each spring when our grass is lush. I receive payment of X$ per pound gained. Let’s assume I get 50 cents per pound and that my herd gains 300 pounds on average. I earn $15,000 for my trouble. That hardly pays me to do it, I suppose, unless I can figure out another return, although honestly it doesn’t take many hours at all during the entire 5 months. Fortunately for me, there is a real return, non-cash but easily quantified. Cattle produce approximately 10% of their weight in wet manure and a similar amount (in terms of weight) in urine each day. My 100 cattle average 750 pounds while on my place so I believe they are walking around in fractal patterns (think random paisleys) collectively depositing 7500 pounds of manure and 7500 pounds of urine each day. For me. I have them for about 150 days, so in that time period they wander through my 240 acres divided into 14 paddocks and pastures and deposit 1.125 million pounds of manure and 1.125 million pounds of urine in neat little piles and puddles. Now, today urea costs about 20 cents a pound ($400/ton) and liquid nitrogen costs about 15 cents a pound ($300/ton). I will ignore the high cost of equipment and labor it might take to get this fertilizer spread over 240 acres, and also ignore the other well-known negatives with commercial fertilizer, and simply note that I have received $425,000 worth of fertilizer distribution on my pastures,and been paid for the pleasure. But I am not done, because in the fall I get a smaller herd of bred heifers on the ranch (50) for about 100 days. By now you can do the calculations of 50 cattle weighing 1000 pounds each wandering around for 100 days, or exactly 1 million pounds of wet manure and urine distributed spatially and chronologically (day in, day out) on my pastures, worth about $170,000 at market rates.
I have not counted in the benefits to the paddocks of soil disturbance and brush reduction, in addition to the fertilizer. We are gearing up our mobile meat chicken house operation so we can run them through these now enriched pastures where cow pies and enriched grasses support a wider range of forage and insect wildlife for the chickens, reducing feed cost and enhancing flavor etc., while ridding the ranch of the disturbing disease vector of the chicken coop. What might be the value of that? In planning and construction is our first eggmobile which will do the same but produce eggs instead of meat. And we can add the further benefit to the pasture of running chickens through the cow pastures in terms of cow pie destruction and distribution, cattle pest consumption and adding chicken manure enrichment, section by section, to the large pastures.
Finally, only three of the paddocks are currently fenced for my sheep flock, but eventually they all will be and so we will be able to run cattle and then sheep, or perhaps mob them together, and finally some form of poultry throughout the grass on a schedule which works. In just two seasons the results in the pastures are remarkable, but I believe they will be outstanding within another few years.
So, back to chickens and eggs. It is clear that cost of inputs (cash and labor) will not determine a yield or gross income from that yield. If they did, then the most inefficient farmer (with the highest costs) should be able to charge the highest price. If you can see that as a form of socialism (to each according to his needs), then you are correct. The idea of farm stands simply raising the price of their eggs (gee whiz, the consumer won’t mind a bit) is rather naive. The customers will mind, and sales will demonstrate how much they mind. A market is a market.
Each farmer has to analyze all of his input costs and all of the yields (including collateral yields in the form of culled eggs which can feed pigs, dogs or other livestock, pasture and orchard fertilization and cleanup, and the final product of stewing hens) and make a simple determination: does having an egg program (of whatever size) fit this farmer on this land at this time? A fancy grocery store can charge $8 or $9 / dozen for farm fresh eggs but an egg stand should be /will be happy to get $4 or $5 for that same dozen.
Instead of proposing collusion, it would be wiser to figure out how synergies on the farm through multiple species, species stacking and better farm organization might bring in other cash and non-cash results which would enhance the real, and total, return.