Cracking Open Economics: Lessons from the Price of Eggs

Benjamin-F-Edwards-Co-Brings-Client-First-Service-and-Informed-Investment-Advice Have you bought a carton of eggs lately? If so, you might have been pleasantly surprised to see how inexpensive they are these days. As of this writing, they’re averaging a 48% national price drop from two years ago.

It’s a benefit for consumers, a problem for egg producers and a clear lesson about economics and investing. Here’s a compressed summary of what has happened:

  • About 10 years ago, as people started embracing eggs as part of a nutritional diet and restaurants started offering all-day breakfasts, demand for eggs increased.
  • But a couple of years ago, the avian flu struck and farmers were forced to kill millions of their egg-laying fowl.
  • With a sudden drop in the supply of eggs, prices shot up.
  • The price jump encouraged farmers to replenish their chickens.
  • Higher prices also encouraged food manufacturers to look for egg substitutes for their recipes.
  • The link between the flu and American producers meant other countries were less inclined to use U.S. suppliers, turning to other suppliers or producing their own.

With a sudden influx of more eggs and less interest in buying them, the producers found themselves facing the classic economic problem: too much supply, not enough demand. The result has been the dramatic drop in egg prices.

The lesson for investors
Besides saving you some money on your grocery bill, plummeting egg prices are instructive in how to think about stocks, commodities and the like.

Say an investor decided that eggs were a good bet. He paid close attention to how scientists no longer thought eggs were so closely linked to heart disease and expected that bit of good news to help keep prices high. So, he put much of his investment portfolio in companies that stood to gain from those elevated prices.

Then the avian flu hit and prices shot up further. He invests even more money. When prices start to tumble, he thinks it’s just a blip. But a couple of years later, after continued decline in egg prices, his investments are worth less than what he initially paid for them.

This is just a hypothetical situation, of course. But it reminds us of two fundamental principles of investing:

  1. Economics are multidimensional: You can’t easily anticipate how everyone connected to a product or service will react to a change in its status, but if there’s a reasonable substitute for a suddenly expensive item, buyers will seek it out.
  2. As much as any item on its own looks like it’s worth a significant part of your portfolio, chances are overwhelming that it’s not. Risks are always lurking that investors can’t anticipate.

In this case, there’s an old saying that’s particularly apt: Don’t put all of your eggs in one basket.