Why does California’s Proposition 12 affect producers and processors outside of California?
On November 6, 2018 California voters passed Proposition 12, known as the Farm Animal Confinement Initiative, with 62.66% in favor and 37.34% opposed. This initiative was to establish minimum space requirements (based on square feet) for veal calves, breeding pigs and egg laying hens. It also banned the sale of veal, pork and eggs from animals confined to areas below the minimum required space.
Prior to the passing of this proposition, California did have minimum space requirements based on animal movement rather than square feet, and California banned the sale of shelled eggs from hens confined to areas that did not meet space requirements based on movement. The existing requirements were passed as Proposition 2 in 2018 and went into effect in 2015.
California has 40 million residents and represents 15% of the US pork market.
What timelines did Proposition 12 establish?
Proposition 12 established January 1, 2020 as the date that:
Calves must have at least 43 square feet of usable floor space per calf.
Egg laying hens of all types must have at least 1 square foot of space per hen.
Proposition 12 established January 1, 2022 as the date that:
Breeding pigs and immediate offspring must have at least 24 square feet of usable floor space per pig.
Egg laying hen operations must comply with the United Egg Producers’ 2017 cage free guidelines, which provide that cage free housing must provide 1.0 to 1.5 square feet of usable floor space per hen and the hens must be able to move around inside the area. The United Egg Producers’ cage free standards are 144 square inches per hen with freedom to roam and access enrichment areas such as a scratch area, perches, nest boxes and dust bathing.
Farmers found in violation of the Proposition could be found guilty of a misdemeanor and fined up to $1,000 and/or serve up to six months in jail.
What happened after the voters approved Proposition 12?
The National Pork Producers Council (“NPPC”) and American Farm Bureau Federation (“AFBF”) filed a legal complaint on December 5, 2019 asking the court to invalidate Proposition 12 based on violation of the Interstate Commerce Clause of the US Constitution. The judge dismissed the case on April 27, 2020.
The North American Meat Institute (“NAMI”) filed a legal complaint on October 4, 2019 asserting Proposition 12 violated the Interstate Commercial Clause by erecting a trade barrier shielding California producers from out of state competition. On October 15, 2020 the court found against NAMI. This case worked its way through the court system on appeal, but on June 28, 2021, the US Supreme Court denied NAMI’s petition to be heard.
What is happening with implementation of the Proposition 12?
The state of California was to have the rules finalized by September 2019, however, the comment period did not end until July 12, 2021. As a result published rules, including funding, enforcement, and other issues, are not available with implementation still scheduled to begin January 1, 2022. When Proposition 12 was contemplated, it was expected that pork producers would have at least two years to comply with the regulations once finalized.
What is the economic impact of Proposition 12?
California’s state legislative analyst and director of finance estimated the fiscal impact as follows:
Potential decrease in state and local tax revenues from farm businesses, likely not to exceed the low millions of dollars annually.
Potential state costs ranging up to ten million dollars annually to enforce the measure.
This estimated fiscal impact does not address the financial impact on pork producers and processors.
Pork producers and processors across the country are impacted by these rules. Less than 4% of the sow housing in the US meets these California standards. California consumes roughly 15% of all pork produced in the US. California consumes approximately 255 million pounds of pork per month and produces only 45 million pounds per month. Proposition 12 requires that pork sold in California meets the Proposition 12 standards.
When constructing new sow facilities, the barn cost per sow is expected to increase from $1,600 to $2,500 per sow to an average of $3,400 per sow. A 1,000-sow barn that would have cost $1.6 million to $2.5 million before Proposition 12 would now cost $3.4 million, or 165% of the average pre-Proposition 12 cost. This a significant increase in fixed costs and the amount of interest required to finance a new operation.
The cost to retrofit existing barns to meet the Proposition 12 standards needs to be evaluated for each operator as land availability, building configurations, and existing pen set-ups vary from operation to operation. However, it is not an easy alteration and requires planning, time to retrofit, and funding. A farmer in Iowa has estimated that changing his 300-sow facility would cost $300,000, or $1,000 per sow, and his herd size would be reduced from 300 sows to 250 sows, requiring he earn an additional $20 per pig sold to achieve the same performance level. An economist at North Carolina State University estimated the extra costs to produce pork under the new standards would be 15% more per animal for a farm with 1,000 breeding pigs.
Processors will be required to track Proposition 12 compliant hogs and separate those cuts from standard pork production. This will involve new systems to track pork through the intake and processing cycle and the distribution period. This will impact processing, storage, and distribution of pork within the US.
What are other states doing?
During the 2019 legislative sessions, the Oregon and Washington state legislatures passed laws requiring cage free hen housing by 2024. Cages must be removed by the end of 2023 and egg farms will be required to have facilities that include space for natural behaviors identified as scratch areas, perches, nest boxes and dust bathing areas. Commercial egg farms cannot sell eggs produced by caged birds after 2024, with farms with fewer than 3,000 egg laying hens being exempt from this production requirement.
What are the next steps for producers, processors, and their lenders?
Pork producers will need to determine the costs to convert existing facilities to the new standards, and evaluate the cash flow impact of fewer animals. Producers and their lenders will need to be creative in developing ways to deal with these rules within the economic parameters of each operation.
Processors will need to develop the systems required to track animals through processing, including storage and distribution by compliance to Proposition 12. Processors and producers will need to focus on the reporting requirements, rules, and regulations yet to be published to ensure that compliant and non-compliant pork are clearly identified. Some processors may elect to only accept compliant or non-compliant pork, and producers will need to be aware of those decisions to determine sale avenues for the producer’s animals.
Consumers in California are expected to experience higher pork prices as the deadline for compliance approaches and the new guidelines become effective. Some economists have estimated there could be a 60% increase in the cost of pork in California while the farm and food processing economy adjusts to these new rules.
Egg laying operations need to be concerned about the change to cage free requirements as opposed to cage size requirements.
Overall, Proposition 12 and similar measures in other states will result increased costs in terms of capital outlays and increased operating costs per animal or bird. Producers, processors and their lenders will need to develop the plans to comply or evaluate the impact of noncompliance. The timeline is tight, with the current January 1, 2022 implementation date.
Cash flow forecasting and planning will be key to managing an operations through the compliance process.