No Yolk: Shortages and Spikes in the Time of COVID

Why did prices climb so quickly in the wake of the pandemic? The suddenness and size of two large demand shocks are largely to blame. Prior to the pandemic, Americans consumed about 52% of their food away from home through restaurants and cafeterias and the remaining 48% through grocery stores and supermarkets. Government shutdown-orders and consumer fears led to a spike in demand at groceries and a near total collapse in demand for food from restaurants. Year-over-year expenditures at restaurants, school cafeterias, sports venues, and other eating-out places dropped 50% in April 2021,2 with most Americans spending most of their food dollars at grocery stores, supercenters, convenience stores, and other food-at-home retailers. Food supply chains are optimized and specialized to sell to either of those two locations. For example, even bananas are packaged and sold by the bunch at a grocery store but are packaged and sold by the box for cafeterias.

Our research in the journal Food Policy elucidates the challenges for the case of eggs. Although grocery stores sell so-called table eggs by the carton, restaurants often purchase liquid or powered eggs—often referred to ask “breaker” eggs.3 Companies have barns of egg-laying hens specialized to deliver table eggs to groceries or breaker eggs to restaurants. COVID-19 caused a drastic shift in food spending from restaurant to grocery; the naïve view was that the eggs would follow. After all, at the same time the grocery price of eggs was skyrocketing, liquid egg prices plummeted. Given these massive price discrepancies, one would expect the market to reallocate supply. Eggs that would have gone to restaurants could have been easily diverted to grocery stores—right? Yet, sellers of breaker eggs don’t have cardboard or Styrofoam cartons in stock. Thus, one problem was that there was insufficient packaging material available to deliver eggs to grocery stores in the form customers are accustomed to buying. Are we to believe that a more local or regional food supply that was more fragmented would have the right packing materials laying around when the demand disruptions occurred?

The challenges went beyond packaging shortages. U.S. Food and Drug Administration (FDA) regulations prevented a smooth transition, prolonging the grocery store egg price spike. Liquid eggs are pasteurized, and as such, fall under a different set of regulatory guidelines than table eggs. Thus, federal rules prevented eggs from flowing from areas of low demand to areas of high demand. Some liquid egg producers found it more advantageous to depopulate their flocks than to continue losing money with the uncertainty of demand and the regulatory environment. Ultimately, the FDA relaxed their regulatory requirements, and the table and breaker egg markets again reached an equilibrium with table egg prices coming down from their highs.

Regulatory burdens were not limited to disruptions of the egg supply chain during the pandemic. This is perhaps not surprising—beer, for example, confronts more than 125,000 regulatory burdens from the hopyard to the six pack.4 Across the country, regulations and ordinances prevented bars and restaurants from selling their excess food stocks to paying customers. This is especially important as crucial moneymaking social events such as March Madness and St. Patrick’s Day occur in early spring. Food supply chains are fundamentally constrained by biology, and production systems across the nation had spent months brewing the green beer and raising the chickens for buffalo wings for these events. Because food safety ordinances often restrict the sale of raw food products from restaurants, much of this food remained unsold, and the beer ultimately spoiled. In some cases, city and state governments intervened, creating temporary concessions for sales directly to consumers in communities like Bristol, Tennessee and New York, but these concessions were not universally adopted. In other cases, some state governments opted to compensate restaurant owners for their lost sales. For example, the State of Michigan issued “buybacks” of unsold beer, wine, and liquor in April.

Regulatory uncertainty also played a role in disrupting food access during the pandemic. Distinctions between “essential” and “non-essential” employment varied significantly, creating confusion for consumers and for enforcement.5 By not allowing market interactions to occur naturally and instead determining which businesses needed to stay open based on a taxonomy of “essentialness,” policymakers were forced to make calculations regarding the acceptable risk for different types of workers. These decisions required an overlap in expertise regarding institutional arrangements, public health, and economics, invoking F. A. Hayek’s famous knowledge problem. That is, rational economic planning requires such a wide distribution of information that a central authority is unlikely to respond to market incentives as efficiently as individualized participants in the economy. For example, stay-at-home orders reduced demand for gasoline as many workers opted to telecommute. That decrease in gasoline demand led to a decrease in demand for ethanol and forced many ethanol plants to temporarily idle production, which significantly depressed corn prices. Because the ethanol plants were shut down, the spent grains created as a byproduct of ethanol production as a quality source of animal feed became less available, increasing the price of feed for livestock producers at an already difficult financial point. Those connections are often hard to identify in advance and even harder to define in a simple taxonomy of “needs.” Indeed, even labeling labor as “essential” and “non-essential” misses the important fact of any job— it’s “essential” to the person employed! As an example, “essential” workers at meatpacking plants in South Dakota were ordered to report to work even after indicating some illness. At the same time, “non-essential” workers at an apple orchard in Michigan refused to cease their business operation. The height of the absurdity was that supercenters in states like Michigan could not sell seeds and garden supplies in the spring of 2020 because they fell in the category of “nonessential”, at precisely the same time many consumers were worried about food supplies.

By mid-April 2020, another set of disruptions hit the food supply chain. This time it was a massive supply shock caused by the shutdown and slowdown of the beef and pork packing sectors as workers in those industries contracted COVID-19. On May 1, 2020, the number of cattle and hogs slaughtered was only 60% of the levels one year prior.6 With processing capacity shuttered, demand for livestock fell, depressing farm prices for animals. At the same time, less meat was being produced. Grocers were left bidding against each other for a smaller quantity of meat, pulling up wholesale and retail prices. The result was that the farm-to-retail price spread reached unprecedented levels, a phenomenon that prompted multiple lawsuits, a U.S. Department of Justice investigation, and numerous proposed federal regulations. The implicit assumption was that large packers must be raking in windfall profits at the same time livestock producers and consumers were being harmed. This presumption misses the fact that packers were incurring higher costs to retrofit packing plants to protect, test, and socially distance workers. Recent research shows that, when facing risks of a shutdown, it is expected that packer profits would fall even as price spreads rise. Indeed, the stock prices of major packing firms such as Tyson and JBS significantly under-performed the entire market over the year 2020. The lesson is that COVID-19 created few winners and many losers.

One of the pre-pandemic criticisms associated with the food system was that it generated “too much” food waste. A host of federal, state, and local policies incentivized firms to cut food waste, and a number of private efforts were also aimed at the same end. The result was that food processors and retailers were pushed to optimize supply chains and move toward just-in-time inventory management. Grocery stores bought only as much produce and meat as they thought they needed. As we’ve learned however, a focus on waste-reduction and efficiency has costs. A system working on just-in-time inventory management is not one well designed to respond to a large, unexpected increase in demand. The result was empty shelves. Seen in this light, food waste may be a cost we might need to pay to as a form of insurance against unexpected demand or supply shocks. Consumers intuitively grasp this need, as stocking up behavior and pantry loading was a rational response to the uncertainty around future food supplies and high food prices experienced at the onset of COVID-19.

If one silver lining has emerged for food supply chains from the pandemic, Americans have become even more appreciative of the people who get food to their plates. This might perhaps be due to the entrepreneurial spirit of producers. When regulations were relaxed, both distilleries and ethanol plants pivoted their production systems to create highly sought after hand sanitizer. This flexibility has been particularly evident for local food systems, as the pandemic has created opportunities for policymakers to rethink the way they regulate innovative local food systems. For example, small-scale meatpackers across the country pivoted to providing butchering services for ranchers in their local area, creating local meat supply chains and spurring renewed bipartisan interest in relaxed small-scale meatpacking regulations.

Ultimately, actors throughout the U.S. food supply chain innovated and responded rapidly to an unprecedented change in the American marketplace. Though government policy facilitated some novel developments such as incentivizing small and medium-sized processing facilities, the most resilient strategies occurred when governments allowed actors within the marketplace to adjust to the changing dynamics of COVID-19. Consider the case of the Pig and the Plow in Northern Colorado. Thanks to adjustments in local “cottage” food laws in the state, this bread company could pivot to an online delivery platform instead of its traditional restaurant and farmers market accounts.7 Similarly, some local governments changed open container laws to allow restaurant and brewery patrons to consume their beverages in designated outdoor areas.

Developing a more resilient food system is likely to confront a series of unavoidable factors. Even without any regulations, those factors are likely to remain critical. Labor constraints exist all along the agri-food value chains, but each step along that chain is likely to confront other unique issues. At the farmer/grower level, biological production constraints, automation, and storage capacity have to be considered. Processors and intermediaries would have to consider issues such as logistical constraints, automation, capacity constraints, worker protection, and storage capacity issues. Finally, food service and retail would have to consider delivery/distribution issues as well as the potential for a more fluid transition between the two institutional arrangements.

Some lessons are likely to remain for the long term. First, support for the agricultural and food community is likely to remain strong for some time. U.S. consumers have become acutely invested in understanding where their food comes from. Second, it is likely that future policy will incentivize smaller scale producers, emphasizing decentralization as a strategy for resilience. Whether such a strategy will, in fact, produce a system that is more resilient remains to be seen; after all, large scale concentrated processing is associated with efficiency and economies of scale.8 Third, consumers are likely to continue their march toward ordering their restaurants and groceries via new technology. Indeed, some forecasts estimate that web-based grocery sales will reach 55% of U.S. consumers within the next three years. Finally, it is likely that lessons from the pandemic are likely to facilitate more regulatory burdens even though many issues in the food supply chain were fostered by constraining resilience via regulation.

Footnotes

[1] More data available at Opportunity Insights: Economic Tracker. Tracktherecovery.org.

[2] U.S. Department of Agriculture, “Eating-out expenditures in May 2020 were 37 percent lower than May 2019 expenditures”. USDA Economic Research Service.

[3] Trey Malone, K. Aleks Schaefer, and Jason L. Lusk, “Unscrambling U.S. egg supply chains amid COVID-19.” Food Policy, March 16, 2021.

[4] See the Center for Growth and Opportunity’s website at “The Economic Geography of Beer Regulations” by Aaron Staples, Dustin Chambers, Trey Malone. Working paper, Sep. 26, 2020.

[5] Trey Malone, K. Aleks Schaefer, and Felicia Wu, “The Razor’s Edge of ‘Essential’ Labor in Food and Agriculture.” Applied Economic Perspectives and Policy. Submitted 26 April 2020: (2021) volume 43, number 1, pp. 368–381.

[6] Jayson L. Lusk, Glynn T. Tonsor and Lee LK. Schulz, “Beef and Pork Marketing Margins and Price Spreads during COVID-19.” Applied Economic Perspectives and Policy, October 2, 2020.

[7] Dawn Thilmany and Trey Malone, “COVID-19 Gives Chance to Take a Fresh Look at How Innovative Local Food Systems are Regulated.” Food Logistics, May 11, 2020.

[8] Jayson Lusk, “Concentration and Resiliency in the U.S. Meat Supply Chains.” JaysonLusk.com, March 11, 2021.