A class action against 13 major egg producers contends that a supply-restriction scheme triggered a nearly 50% price jump in the past two years
Earlier this year, Steve Ribbing, who runs a family-style restaurant south of Buffalo, got fed up with the growing dent in his company's bottom line. The culprit? Egg prices, which have jumped nearly 50% over the past two years. Ribbing griped to his attorney, an act that ultimately led to a lawsuit against more than a dozen egg producers and the industry's trade group.
Critics say the price jump since 2006 was not particularly mysterious: egg producers, the plaintiffs contend, conspired to restrict supply as part of a broad scheme to boost prices. Ribbing's complaint moved from his lawyer to a large national firm, finally becoming a sweeping lawsuit that recently gained class-action status on behalf of restaurants, grocers, and other direct buyers nationwide. The litigation's targets include 13 of the nation's biggest egg producers, including Cal-Maine Foods (CALM), Pilgrim's Pride (PPC) and Rose Acre Farms, as well as a Georgia-based industry association, the United Egg Producers (UEP).
Justice Dept. Is Investigating
The average retail price of a dozen eggs, which had been stable for the better part of a decade, soared to $2.20 per dozen in March, after climbing from $1.63 in 2007 and $1.30 in 2006, according to the Bureau of Labor Statistics. Egg producers blame the increase on surging feed and fuel costs, although prices have retreated 15% since March, to $1.85 per dozen. The restaurant lawsuit filed three weeks ago in U.S. District Court in Philadelphia is one of six separate suits facing the egg industry. Some name a handful of companies while others, like the T.K. Ribbing's restaurant suit, target 16 major producers and interest groups. The suits generally allege similar schemes to raise prices, but the detailed Ribbing suit delves deepest and covers the broadest part of the industry.
The swift rise in egg prices has also caught the attention of the Justice Dept., which is "investigating the possibility of price fixing in the egg products industry," says DOJ spokeswoman Gina Talamona, declining further comment. All of the major egg producers either refused comment or didn't respond to BusinessWeek's requests for comment.
The producers all belong to the United Egg Producers cooperative, which in 2000 enacted an Animal Care Certified Program to improve hens' conditions by giving them more space in cages. Plaintiffs say the program was designed solely to lift egg prices by curtailing egg supplies. The total U.S. supply, which grew steadily from 7.1 billion dozen eggs in 2000 to a peak of 7.6 billion dozen in 2006, is down to 7.5 billion dozen this year, according to the U.S. Agriculture Dept. "The only portion of the program which they enforce are the ones restricting the total number of hens and production," says Jonathan Lovvorn, vice-president and chief counsel of the Humane Society of the U.S. "You violate that, they kick you out immediately." He says the co-op ignores "all kinds of other things you can do to animals—not providing proper veterinary care, letting animals die without proper food or water. Those are things we've seen."
UEP spokesman Mitch Head calls allegations that the welfare program was aimed at trimming hen numbers "ludicrous." "There's no provision for any farmer to not build more houses, add more conventional cages, add cage-free or free-range [hens]; they could've added as many as they wanted to," Head says. The program results in fewer hen diseases and lower mortality, and improves food safety, he said. "This is not what was better for the farmer. It was better for the hens and for our consumers."
Ultimately, however, the egg industry might not even need to disprove the price-fixing claims. The suit's success hinges on the 1922 Capper-Volstead Act, which was designed to help farmers deal with low prices by offering their co-ops some exemptions from antitrust laws as a way to protect prices. Plaintiffs argue that the UEP is not a cooperative but a trade group—and therefore the egg producers' actions violate antitrust laws. "They've essentially admitted what we have said has been happening," says James Pizzirusso, a Washington (D.C.) attorney with law firm Cohen Milstein, who represents the plaintiffs. "At this point it will come down to a legal question as to whether their activities were protected or not, and we think they were not."
Donald Barnes, a Washington (D.C.) attorney who represents Rose Acre Farms, specializes in agricultural co-operative law and says the egg industry is exempt. "The members can simply get together in a co-op and fix the price; members of a trade association can go to jail for doing that," he says. "Based upon what the complaint says, the conduct is exempt under the Capper-Volstead Act and, even if it wasn't, the chain of causation is very, very tenuous and speculative." Any trade group that's not an agricultural co-operative would face penalties for colluding to set prices. If, for example, U.S. airlines were found to have colluded to cut seat supply as a way to boost fares—which most carriers have been doing independently—they could face steep penalties.
Brent Hueth, director of the University of Wisconsin's Center for Cooperatives, says Capper-Volstead doesn't offer co-ops complete protection from antitrust law. A court must determine that any price enhancement was "reasonable," Hueth says. "Unreasonable price enhancement is very idiosyncratic in terms of how courts interpret that," he adds. "You never know going in. There's always a gray area. It's a subjective assessment." Hueth also notes that common characteristics among trade groups are small administrative staffs and lobbying in Congress. UEP has a small staff in Alpharetta, Ga., and, according to its Web site, works to "establish a strong Washington presence."
About 98% of America's eggs come from enormous suppliers, such as Cal-Maine, Moark, and Michael Foods. These suppliers are vertically integrated, controlling every step of the process from the laying hens to inspections, cleaning and cooling the eggs, and transportation. There are only about 250 egg production companies in the U.S., and most of the business is done by a few large players who have consolidated in the last decade, says Mickey Latour, a poultry specialist at Purdue University.
The UEP's Animal Care Certified Program began in 2000 after an independent panel urged the egg industry to improve the living conditions of hens. The program called for 40% more space per hen—pushing the total to between 67 and 86 square inches per bird—and imposed mandatory site inspections and penalties for violators. The UEP did not respond to a request for data on violations over the past eight years.
Plaintiff lawyers claim that because of the inelasticity of egg demand, even a slight drop in production can send prices surging and that an industrywide program to decrease the number of laying hens was one way the UEP ensured low supply. In a FAQ section for investors on its Web site, Cal-Maine also draws a connection between the new space requirements for birds and tighter egg supply. But Randon Wilson, a Utah attorney who specializes in agriculture cases, says the care program was not about curbing egg supply. "The Animal Care Certified moniker is a tremendous expense to these producers," says Wilson, who is not involved in the egg litigation. "They did it so they wouldn't be in the bull's-eye of animal-care experts."
At a June investment conference at The New York Palace Hotel, Cal-Maine Chairman and CEO Fred Adams Jr. addressed the topic of supply. "While it makes it easier to communicate that when feed costs are up, egg prices should be up, that's not really the case," Adams said, according to a transcript of his talk cited in the suit. "Eggs are up because the supply and demand is in good balance, and it's reflecting higher prices on its own. If the supply of eggs remains in check, or favorable to the demand side, I think we will have minimum problems in raising prices." Adams and Cal-Maine did not return calls for comment. Says Pizzirusso: "The allegations are really coming right out of their own mouth."