We Should Pay More for Cage-Free Eggs - but Not Much More

Tainted Eggs
John Raoux/AP

Three years ago, Burger King (BK) shocked the conscience of capitalism by showing that capitalism has a conscience.

Burger King announced a five-year plan to move 100 percent of its egg purchases from suppliers who practiced "factory farming" to more animal-friendly producers. Henceforth, Burger King would only buy from companies that gave their hens room to roam, places to perch, and nesting boxes in which to lay their eggs. The U.S. Humane Society was quick to voice support: "For every cage-free egg ... that Burger King sells, animals have been spared lifelong confinement in a cage so small they can barely even move," its food policy director told The Associated Press at the time.

It's Not Just BK -- or Even Just Restaurants

In 2010, Subway arguably sparked this trend with a plan to phase in purchases of cage-free eggs for its fast-food restaurants. One year later, McDonald's (MCD) jumped on the bandwagon, announcing it would begin buying 1 million cage-free eggs a month (and 1 million more eggs from producers who raise their hens in cages larger than the industry norm). Most recently, Dunkin' Donuts (DNKN) joined the movement, declaring a "commitment" to cage-free last month, and saying it will double purchases of cage-free eggs (to 10 percent of purchases) by the end of next year, en route to going "100% cage-free."

Mega-grocers Walmart (WMT) and Costco (COST) have gone cage-free, too, on their private-label eggs. And in grocery aisles around the land, by 2020, all Hellmann's mayonnaise made by Unilever (UL) will be made using cage-free eggs.

But at what cost to you?

Which Came First, the Price Hike or the Cage-Free Egg?

Last month, The Wall Street Journal cited a study by the Coalition for Sustainable Egg Supply (an industry trade group also known as CSES) that found "little difference in egg quality" between chickens confined to industry-standard cages (which provide less living room than a piece of 8 1/2" x 11" printer paper) and those raised in larger "colony cages" such as are now mandated in California, or in chickens allowed to roam free in a barn.

CSES did find one big difference between these alternative systems, though: cost. Specifically, it says it costs 13 percent more to run a chicken farm with "California cages." And it costs 36 percent more to run a cage-free farm.

And whether you buy them as part of an Egg McMuffin, or buy them by the carton at the grocery store, this means these eggs are going to cost you more, too.

Don't Sugar-Coat the Easter Egg. How Much More?

Well, logically, 13 to 36 percent more, if wholesalers simply pass along their cost of doing business, and retailers then pass along the higher wholesale cost they must pay, in similar proportion. That would suggest that if the average retail price of a dozen eggs (Grade A, large) in your local supermarket is $2.13 (per U.S. Bureau of Labor and Statistics data), then cage-free eggs might need to cost as much as $2.90.

Now granted, some grocers have been reported to be charging as much as $5 a dozen for cage-free eggs. But according to the U.S. Department of Agriculture, prices are already turning back around.

This time last year, the retail price of a dozen large, white, cage-free eggs in American supermarkets was averaging $3.99 per dozen. At one point in April 2015, however, average prices hit $2.90 on the nose -- precisely 36 percent more than the average cost of a dozen "ordinary" eggs. And they could move lower still.

The Mathematics of Egg Production

Consider: A 36 percent increase in retail prices is enough to push a $2.13 carton of eggs up to $2.90. But back at the farm, the original cost to produce those eggs was only 84 cents (on average, and according to the USDA). The 36 percent increase to that production cost, therefore, only added about 30 cents.

If that extra 30 cents gets passed from producer to wholesaler, then from wholesaler to retailer, and finally from retailer to consumer, then cage-free eggs might only need to cost $2.43 per dozen. (To be clear, that's $2.13 for the ordinary retail cost, plus 30 cents in added cost to raise hens cage-free.) So if retailers are selling cage-free eggs for $5, or $3, or even just $2.90 -- chances are, those retailers (and perhaps the wholesalers and producers as well) are charging more than they need to, to just cover the added cost of converting egg production to cage-free.

So why are retailers charging $2.90, $3, and $5 for cage-free eggs? Simply put, because it seems customers are willing to pay that much more for the moral satisfaction of knowing the eggs they eat come from chickens who were raised right.

And that's not necessarily a bad thing, even if prices are higher than they need to be. These higher-than-necessary prices give customers satisfaction. They give retailers higher profit margins. And they cover the added production costs egg producers must pay to accommodate cage-free chicken farms. Sure, the prices are probably a bit higher than they need to be, and maybe they'll continue to trend down over time. For now, though, as CEO Marcus Rust of Rose Acre Farms -- one of America's largest egg producers -- told The Wall Street Journal: "Farming is about making a profit, and if someone is willing to pay us extra, we're going to do that."

So long as that profit is fair, cage-free eggs could turn out to be a win-win-win for producers, consumers, and chickens alike.

Motley Fool contributor Rich Smith would cross the road for a cage-free egg -- if the price was right. He does not own shares of any company named above. The Motley Fool recommends Costco Wholesale, McDonald's and Unilever. The Motley Fool owns shares of Costco Wholesale. Try any of our Foolish newsletter services free for 30 days. Check out our free report on one great stock to buy for 2015 and beyond.