Proposition 12: U.S. Pork Supply Chain Locked in Limbo, Rabobank Says
Proposition 12, California’s animal welfare rule, is slated to take effect in less than a year on Jan. 1, 2022. But with these new regulations still mired in a legal battle, the pork industry is left in limbo, Rabobank says in a special RaboResearch report.
“With only months to make the necessary production changes, and less than 4% of the U.S. sow herd currently raised in accordance with the new regulations, compliant pork supplies will fall short of market needs,” says Christine McCracken, Rabobank senior analyst-animal protein.
High Stakes for All Segments
But, can you blame producers with all of the confusion around implementation and with few packer processors offering premiums to convert to the new standards?
“While Rabobank has no unique insight into the legal merits to the appeals and although a delay in the implementation of Proposition 12 appears likely, the U.S. pork supply chain must be prepared for the disruption associated with a shift in the market to higher animal welfare standards in California,” McCracken says.
As higher welfare and sustainability standards are raised, pork producers must determine which standards they will adopt.
“Absent a legal victory or a delay in implementation, the U.S. pork industry will likely face significant supply chain disruption as the rules take effect on Jan. 1, 2022. To meet the requirement that all fresh pork products come from sows that comply with the new standards by the January deadline, producers would need to adjust production methods in 2021,” McCracken says.
Unfortunately, the changes that will need to be made to production systems will cost hundreds of millions of dollars for U.S. pork producers. Economics will drive the decision on whether to comply with California’s new rules, she adds. Although several large production systems are actively negotiating long-term supply agreements with their packer processors that would include a premium to offset the cost of conversion, she says few have come to an agreement.
This delay in packer-processor commitments reflects ongoing uncertainty from end users, McCracken says. Until regulators issue the final regulation and outline the specifics of its enforcement, Rabobank does not expect any meaningful investment.
“U.S. packer processors must be prepared to secure sufficient supplies of compliant hogs and ensure continuity of their supply chain. This will require upfront premiums guaranteed to producers as well as investments in traceability and secured supply,” McCracken says. “To recoup these costs, processors of both commodity and value-added products, like bacon, will need to pass through the added expense.”
Rabobank expects the market to offer adequate financial incentives to remedy this situation when the final rules are issued.
Flexibility Needed
Proposition 12 is one of many animal welfare and sustainability challenges facing agriculture. This attempt to mandate production practices is not unique and won’t be going away anytime soon, she adds.
“Given that it is nearly impossible for producers to accurately predict regulations when they make their investment decisions, it is inevitable some producers will at some point face some loss of marketability,” McCracken says.
What is clear, she says, is that animal welfare standards are rising and producers must keep adapting.
“In order to remain competitive, the industry needs to be prepared to offer practical solutions that align with consumer values and take an active role in the development of policies, regulations and voluntary standards,” McCracken says. “Rather than react to a complex series of conflicting animal welfare and sustainability guidelines, Rabobank encourages the industry to take a proactive role in the conversation and shape its development.”
As the industry experienced during the early stages of the COVID-19 pandemic, quick changes to the available supply or demand for pork products can have a long-lasting effect. The complexity of the U.S. pork supply chain makes it difficult to quickly adapt to changes in production practices. However, the industry must remain adaptable to meet market expectations, she says.
Construction Boom Likely
Rabobank analysts expect at least 15% of U.S. hog producers would need to convert to the new production mandates at considerable cost to comply with the California mandate. For producers already housing sows in group pens, she says this transition requires additional space or a reduction in sows.
For most producers, the new regulations would require about 20% to 25% more barn space or force a reduction in stocking densities. McCracken says retrofitting a barn can be challenging, so she expects producers are more likely to construct new barns to maintain pig flow.
“Adding capacity is never an easy decision and is influenced by availability of land and the ability to obtain permits,” she adds. With higher costs for building materials like lumber and steel, she expects this to be a hard decision, especially for producers who have not already moved to group housing or recently converted their operations.
What Does This Mean for California Consumers?
Based on current sow housing and barns expected to convert, U.S. producers would only be able to provide 40% to 50% of California’s compliant pork needs, Rabobank says in the report. This imbalance in “compliant” pork supplies is expected to result in a short-term surge in product prices in California and a drop in pork consumption.
“For packer processors with access to compliant pork, there could be a first mover advantage, although the benefits would shrink over time as financial incentives would incentivize additional production,” McCracken says.
In the long run, she expects the bifurcation of the U.S. market will introduce inefficiencies in the supply chain for the packer processor and structurally higher prices for the California consumer, while having a negligible impact on wholesale pork prices in the remainder of the U.S. market.
A Wake-Up Call
Producers need to accept that customer expectations around animal welfare and sustainability are increasing, McCracken says. Regardless of the outcome in California, changes will need to be made.
“Seeking out best practices and proactively establishing a higher bar would let the industry lead, rather than follow, on animal welfare and sustainability regulations,” she says.
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