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Earlier this week in The Stockout CPG-focused newsletter, I discussed the impact that China's efforts to replenish its hog population was having on corn and soybean exports as well as the related transportation challenges. Today, I dig into another pork-related issue, California's Proposition 12, which could have a major impact on pork supply chains and prices throughout the United States in the coming year, ultimately impacting packaged food companies. For updates on issues impacting CPG supply chains, please subscribe to The Stockout here.
What is Proposition 12?
Proposition 12 is an animal welfare ballot initiative that California voters passed in 2018 with 60% of the vote by "largely urban voters," to use the industry's phrase. It sets minimum standards for confining farm animals (egg-laying hens, veal calves and breeding pigs) in California and prohibits the sale of products (eggs, veal meat and pork meat) in California from farm animals that were confined in a way that does not meet certain minimum standards. The portion of Proposition 12 that goes into effect on Jan. 1, 2022, and requires sows (pigs kept for the purpose of commercial breeding) to have a minimum of 24 square feet per animal and requires egg-laying hens to be housed cage-free.
How has the meat industry reacted to this regulation?
By challenging it in the courts (so far, unsuccessfully). The North American Meat Institute (NAMI) argued that the legislation violates interstate commerce laws because it is a California law that imposes restrictions on farmers across the United States — all farmers that intend to sell products in California are impacted. NAMI's argument was shot down by the U.S. Court of Appeals, and NAMI recently filed a petition with the U.S. Supreme Court asking for review. The new laws also continue to be challenged in the courts by both the National Pork Producers Council and American Farm Bureau Federation on behalf of hog farmers, who filed a lawsuit arguing that Prop 12 is unconstitutional. My perception is that the argument that the California laws overstep by influencing production practices in other states is not a winning one. We have seen similar situations in other industries, such as automotive, which has had to deal with emissions standards in California that are stricter than national standards, impacting manufacturers in other states and countries.
In the past year, California outbound tender rejection rate rose from 10% to 44.8% and is currently below the U.S. reefer tender rejection rate.
(Source: SONAR; the percentages of outbound tendered refrigerated loads that are being rejected by carriers in California and the U.S. as a whole are shown in white and green, respectively. For more information on SONAR or to request a demo, click here.)
Is the pork industry ready for this change?
No. Less than 4% of U.S. sow housing currently meets the new standard, whereas about 20% of U.S. pork would need to be compliant. Producers have been reluctant to make the investments, with Proposition 12 continuing to be challenged in courts.
Will this have an immediate impact on the market on Jan. 1?
Not likely. The packaged pork that is already in inventory prior to Jan. 1, 2022, does not need to be discarded or sold outside of California if the product originated from animals not raised according to the Proposition 12 confinement standards. At the end of the day on Dec. 31, 2021, the animals covered by the law will no longer be able to be "confined in a cruel manner," in accordance with the new law. In short, California hogs need to have more room by New Year's Day.
What impact are the new laws likely to have on the market for hogs and pork products?
There could simultaneously be pork shortages and pork surpluses — shortages of compliant pork that can be sold within California and surpluses of noncompliant pork that can be sold outside California. RaboResearch estimates that compliant pork could fall 50% short of the state's needs. California accounts for about 14% of U.S. pork production but produces less than 2% of its own pork, with most of its production sent to other states or exported. Presumably, pork producers will rearrange supply chains so more pork that is produced in California is also consumed in California since pork that is either produced or sold in the state needs to meet the requirements.
The tightest outbound reefer markets (highest tender rejection rates) are shown in darker blue and include much of the Upper Midwest.
(Source: SONAR; the percentage of outbound tendered refrigerated loads that are being rejected by carriers are shown according to the key above. For more information on SONAR or to request a demo, click here.)
Elsewhere in the world of pork, food distributor Sysco filed a price-fixing lawsuit against pork producers. Sysco accused Tyson, Smithfield (the largest pork producer), Hormel, JBS and others, which Sysco claims control 80% of the market, of a price-fixing scheme in which they shared pricing and other sensitive pieces of information in an anti-competitive manner to elevate pork prices. The lawsuit claims that this practice dated back to at least 2009. That is the latest in a number of pieces of litigation involving price-fixing claims, including a settlement between JBS and food-service companies.
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