More Uncertainty for Pork Industry in a Very Uncertain Market
The Supreme Court’s ruling on Proposition 12 has added “a whole bunch more uncertainty to a very uncertain market,” said Lee Schulz, Iowa State University ag economist and Extension livestock specialist.
The entire pork production system will experience great financial burden from the expense of retrofitting existing barns and building new facilities to the expense incurred for further processing and retail segregation.
“A lot of those exact cost estimates are yet to be determined,” Schulz told AgriTalk’s host Chip Flory. “But what we know is this will result in a much higher cost to producers and those costs are going to vary throughout the different segments of the industry.”
The industry has to reconfigure, and some already have, Schulz explained.
“We know there's been some new construction that meets the Prop 12 guidelines. It's relatively small, but the first movers have decided to adjust. Often, those are ones that have a lower cost of production which may be because of economies of size, or operations that have been able to secure premiums.”
And those aren’t just short-term premiums, he pointed out. When you think about an investment of this scale, premiums are going to be required over the life of the investment.
Can the Pork Industry Adjust?
This situation is unprecedented, so that adds great uncertainty to the outlook, he explained.
“I've been covering the pork industry here at Iowa State University for roughly 11 years, and we've seen the industry have tremendous flexibility. Just think about all the challenges the industry has had over the past several years. The ability of producers to respond is not in question,” Schulz said.
However, the costs required to become Prop 12 compliant are very large and amidst the worst financial times for pork producers in 25 years.
“You have to go back to 1998 to find pork industry losses this large,” he said. “You're adding a big cost to an industry that's already at historically high costs and suppressed hog prices. We've already seen contraction occurring and exiting of the industry. This will only add to that that exodus, because of the higher costs that it's going to incur on the entire industry.”
As the industry continues down a road where adjustments will be needed to comply with Prop 12 rules, Schulz believes producers will have to find a way to adapt as the industry can’t afford not to sell pork into California. If the industry stops selling pork to California (which consumes 15% of the pork sold in the U.S.), it will put a lot more pork on the rest of the U.S. states and potentially, on the export market.
“That would impact prices, so all else equal, we would see lower prices at retail and lower prices to producers in a scenario without the California market,” he added.
Looking forward, producers will need to receive premiums to accommodate expenses incurred. That requires consumers willing to pay for it.
“I think what gets a little bit lost in this scenario is that this isn't a voluntary program,” Schulz said. “We've seen premiums for voluntary production practices. This is one that's mandated due to a ballot initiative. Consumers were voting but not necessarily voting with their dollars. We'll see if consumers are willing to pay higher prices for this compliant pork.”
More from Farm Journal's PORK:
Prop 12 Response: Iowa Lawyer Says ‘Don’t Make Any Rash Decisions’
Prop 12 Ruling: A Major Blow to Farmers and Consumers Who Will Pay the Price
Prop 12 Reactions: From Hogwash to Delight
BREAKING: Supreme Court Backs California Prop 12
Ripple Effect of Prop 12 Will Be Nothing But Bad News, Rep. Johnson Says