People might say they want to buy cage-free eggs, but they're not willing to pay more for them. Cal-Maine Foods (NASDAQ:CALM), the largest egg producer in the U.S., has indicated that after committing significant resources to produce cage-free eggs, it doesn't make sense to do so anymore and it's cutting back on their production.

In the company's recent first-quarter earnings press release, CEO Dolph Baker said, "... the higher price gap between conventional eggs and specialty eggs has resulted in reduced demand for specialty eggs. We have adjusted our production levels in line with current customer demand for cage-free eggs, and we are well positioned to increase our capacity when demand trends change."

Cage-free mania

The 2015 declaration that McDonald's (NYSE: MCD) would be switching over to using only cage-free eggs at its 16,000 restaurants within 10 years seemed to swing things in favor of better conditions for laying hens and others that were under pressure from animal-rights activists also took the pledge. Yum Brands!'s Taco Bell, Wal-MartPepsiCo, and numerous restaurants, retailers, and food processors took the cage-free pledge.

Close-up of eggs in a carton; one of them is cracked and the yolk is showing.

Image source: Getty Images.

The egg industry prepared for sweeping new demand. The second-largest egg producer, Rose Acre Farms, spent $250 million to build bigger barns, with 20% of its hens currently cage-free. Cal-Maine partnered with Rose Acre on a new facility that would accommodate between 1.8 million and 2.9 million laying hens.

What the industry couldn't have foreseen was a confluence of events that would undermine the movement.

Chickens coming home to roost

Between late 2014 and early 2015, an avian flu outbreak in the U.S. devastated flocks of laying hens, leading to the slaughter of over 40 million birds, or 12% of the country's laying flock. That caused egg prices to spike, with Bureau of Labor Statistics data showing the average price peaking at almost $3 per dozen.

Surging prices caused egg consumption to fall in 2015, and pushed the industry to quickly replenish its flocks to profit from the situation. Although consumption did pick up again and is back to about where it was before the flu outbreak, flock sizes continue to rise, and now egg prices are depressed.

The American Egg Board estimates egg production will rise 2.7% this year over 2016, which notched production up 5.7% from 2015. Production today is 3% higher than before the flu outbreak. At $1.42 on average per dozen grade A large eggs, egg prices are above their lows, but still below last year's prices and half of what they were at their peak.  

Ruffling some feathers

The lower prices have scrambled Cal-Maine Foods' business. Where low prices would typically have producers reducing their flock sizes, the call for cage-free eggs had them increasing them, further depressing prices. But in its latest earnings announcement, the CEO said that was going to change.

Hen with egg in nesting box

Image source: Getty Images.

Despite the corporate pronouncements in favor of going cage-free, the price gap between conventional eggs and specialty eggs has reduced demand for the latter to such an extent that Cal-Maine is cutting production "in line with current customer demand." Buzzfeed reported in June that cage-free eggs cost $1.25 to $1.50 more per dozen than traditionally produced eggs. Cal-Maine says it's ready to resume higher production if the market really wants it, but until then it's opting to dealing with the reality of the marketplace.

So is Rose Acre Farms, which told Bloomberg Markets, "We are going to be in a holding mode until retail pays a warranted price."https://www.bloomberg.com/news/articles/2017-10-13/with-a-667-price-mark-up-fancy-eggs-find-fewer-buyers-in-u-s

Cal-Maine's two biggest customers are Wal-Mart and its Sam's Club warehouse club, which accounted for 29% of total revenue in fiscal 2016, with eight other unnamed customers contributing another 41% to the total.

Like McDonald's, Wal-Mart is committed to being cage-free by 2025, but whether it can do so if its customers refuse to pay up for the privilege of having hens raised more humanely is something Cal-Maine Foods isn't waiting around to find out.

 

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends PepsiCo. The Motley Fool has a disclosure policy.