DEMAND for free-range eggs has jumped more than 15 per cent in the past five years and now accounts for one in every five eggs produced in Australia.
Farmers deliver about four billion eggs to market annually, worth an estimated $659.6 million in 2014-15.
Cage egg production still dominates the industry and consumer buying preferences, but it is growing at less than two per cent a year as big retailers cash in on the popularity of free-range and organic marketing themes and reduce shelf space for lower priced cage egg lines.
While rising shopper awareness and concern with product provenance has encouraged shoppers to buy more free-range eggs, research group IBISWorld warns farmers and food service businesses are increasingly likely to be squeezed by the trend.
"There are significant costs associated with altering farming methods to switch to free-range production," said IBISWorld industry expert Brooke Tonkin.
Yet farmers who resisted the free-range trend ran the risk of being caught in an oversupply of cage eggs.
"As supermarkets and fast food outlets change their purchasing policies, cage eggs producers could find themselves having to accept lower prices from downstream players, or selling their eggs for processing into low-value powder," Ms Tonkin said.
At the other end of the food chain, cafes, restaurants and other food services already operated with tight margins and could face significant bottom line challenges because of the shift to more expensive free-range farm output.
Supermarkets sold about 1.5 billion eggs in 2014-15 with the major retail players using free-range brands to command an ever-increasing share of egg sales revenue and future volumes.
"Supermarkets have been quick to take advantage of the higher margins attached to free-range eggs, and are keenly advertising the responsible sourcing of their products to justify the price hike," said IBISWorld's Stephen Gargano.
The inelastic nature of egg demand had also given retailers considerable power in setting prices, leaving consumers who were drawn in by the free-range marketing message to be price-takers.
These shoppers had no choice but to accept the price jump.
However, Ms Tonkin noted consumers often understood the extra farming costs associated with free-range farming and believed the price rises were justified.
Woolworths would remove all cage eggs from its shelves, including its house brand, by 2018, while Coles no longer sold cage eggs under its house brand.
Aldi continued to resist the higher-priced trend because it was at odds with its efforts to be seen as a low-cost grocery option.
Back on the farm, Ms Tonkin said farmers faced the highest stakes in making the shift to non-cage egg production because they generally could not convert expensive existing cage-egg infrastructure into free-range farms, without acquiring extra land suitable for chooks to roam and feed on.
They also had to buy new and additional equipment or remodel existing barns.
While some farmers would recoup some of their costs through the higher prices for non-cage eggs, Ms Tonkin said some smaller players may be better off leaving the industry than making the transition.
IBISWorld noted production of organic eggs, which tended to be a segment of the free-range offering, grew almost 50pc annually in the past five years but was still only a 78 million eggs per year market.