Gazing across a sea of 30,000 White Leghorn chickens, Jerry Armstrong sees only hungry mouths to feed. Since the farm price for eggs dropped to a 22-year low last month, it's become difficult for the Valley Center farmer to feed these hens and the 970,000 others he has in sheds scattered around San Diego County, let alone pay his workers and keep the utilities turned on.
"We've had a very low market," Armstrong says. "Even Easter was barely break-even. But with this many chickens, you can't just jump out of the egg business."
A glut of eggs in the Midwest is the culprit for the rock-bottom prices plaguing farmers such as Armstrong. The oversupply also has led to a 22-cent-a-dozen nationwide drop in the retail price of eggs this quarter.
But here in California, prices have defied the laws of economics, sticking close to the $2 mark, rather than sliding as the supply has surged. Retailers in California charge an average of $1.95 per carton, twice that of most other regions of the country, according to data from Information Resources Inc.
And in Los Angeles, egg prices run even higher. At Ralphs and Albertsons supermarkets, for instance, large eggs cost $1.99 a dozen this week. Vons has eggs on a buy-one-get-one-free special, but the regular price is $2.19.
The cost of producing eggs is higher in California, owing to higher land, feed and other costs, but these extra costs have little to do with the premium prices on supermarket shelves.
Farmers here receive about the same price for their eggs as farmers in the Midwest, an average of 27.4 cents per dozen last month, according to UC Riverside poultry specialist Don Bell. Although egg processors don't talk about their margins, industry analysts say they add 25 cents or more on top of the farmer's price for grading, packing and distributing the eggs.
It's the supermarkets that take the lion's share of the retail price. Retailers know that Californians, used to paying more for just about everything, won't balk at paying an extra dollar each week or two for a staple like eggs, analysts say.
"The retailer is taking more for inventorying eggs than the producer is for producing them," says Lee Schrader, professor emeritus of agricultural economics at Purdue University. "They don't do anything but punch the cash register, and for that they get more than a buck a dozen."
Supermarket executives in California say they strive to be "competitively priced" and offer regular discounts to loyalty card customers. They acknowledge that their profit margin on eggs is high but defend it by saying it allows them to offer discounts elsewhere in the store. Besides, they say, high prices don't appear to bother shoppers--consumption in California actually increased one egg per person last year--so why not charge what the market will bear?
"We just want to keep the spreads that will keep us in business," says Jack Brown, chief executive of Stater Bros. Markets.
Supermarkets found out just how much consumers are willing to pay for eggs in 1983 when an avian flu outbreak killed off a good portion of the state's flocks. Egg prices soared, and when hen stocks were restored, prices dropped--that is, everywhere but in California, because the demand for eggs stayed strong here despite the high prices.
California consumers do have lower-price options for buying eggs: Trader Joe's and many independent grocers can charge as little as $1.29 per dozen. Costco this week is selling a carton of 18 eggs for $1.23. But once shoppers make a trip to one of the big supermarkets, most aren't likely to make a special trip to another store just for one item.
While the major supermarket chains are doubling and even tripling their profits, egg producers and distributors are barely getting by. Few will talk about their financial troubles, at least on the record. But almost all of the state's 80 producers, clustered mainly in San Bernardino, San Diego and Riverside counties, are at this point unable to pay their bills.
Farmers, Bell says, need to get 48 cents a dozen just to break even. Last year they received an average of 44 cents, and in recent weeks the farm price dropped as low as 26 cents before rebounding this week to about 38 cents per dozen.
Based on the $1.99 retail price charged by Ralphs, that would mean a markup of $1.36 a dozen in Southern California, taking into account the 25 cents taken by processors. By contrast, the average retail markup nationwide in the first quarter of this year was 35 cents a dozen, according to U.S. Department of Agriculture data.
Southern California's high egg prices in recent years have led to allegations of price fixing. A couple of San Diego shoppers took the region's biggest supermarkets to court last year, claiming that the Southland's higher prices were a result of price monitoring.
Although a jury found the three chains not guilty of conspiring to keep prices high, economists say that doesn't mean that they don't try to price within a few cents of one another.