Regulations such as Prop 12 also differ in their economic impacts from private standards imposed on farm production practices by downstream buyers such as grocery retailers and food service operators. Such standards were studied by Saitone, Sexton, and Sumner and applied to restrictions on antibiotic use in pork production. The essential economics of private standards include the decision of downstream firms whether to impose such standards on their suppliers, and the decision of consumers whether to patronize sellers who adopt such standards or to avoid higher product costs by shopping elsewhere. These elements of seller and consumer choice are not present when the regulation applies to all products of a particular type sold in the jurisdiction.Consumers, activists, food companies, and governments regularly express broad farm animal welfare concerns and raise issues with specific farm animal treatment practices. In response, companies have developed private standards for farm animal treatment that they publicize to avoid unwanted controversy or to attract consumers who, while still willing to consume animal products, may be willing to pay for alternative farm practices that they perceive as more accommodating to animal welfare. More recently, there has been and increased government attention to farm animal treatment, commercial weed grow beyond basic criminal sanctions on extreme cruelty.
Such government regulation of farm practices may be applied to farms within a local jurisdiction or products consumed within the regulating judication, even when the production occurs outside that jurisdiction. Such regulations affect the cross-border movement of products and raise international issues well as controversy within national borders. Here in North America, subnational regulations raise important economic questions as well as controversy and challenges related to how they affect farms, consumers, and the supply chain outside the jurisdiction applying the regulations. Regulations on farm animal treatment have received rather limited attention in the literature to date, with most prior studies focusing on California laws regarding housing for egglaying hens . Mullally and Lusk and Carter, Schaefer, andScheitrum analyzed the impacts on egg prices and consumer welfare of AB 1437 that, beginning in 2015, banned egg products from hens confined in less than 116 square inches of space. Oh and Vukina simulated the impact of Prop 12 on the California shell egg market, finding an annual consumer welfare loss of about $72 million.I study California’s sow housing regulations for pork products as an example of regulations of consumer products based on farming practices. My study differs from the previous work in several important aspects. First, I study the Proposition’s impacts on the hog and pork markets.
Although many laws regulating farm animal treatment cover breeding pigs’ housing, the impacts on the pig and pork supply chain have received little attention despite the importance of the industry. Second, my analysis considers the case when a mandate only applies to a portion of the output of the live animal. Many products can generally be produced from a given farm animal, and laws regulating the sale of products into their jurisdiction based on the treatment of the farm animal must then specify which products from the animal are implicated. The prior studies of regulations on housing for egg-laying hens have largely been able to avoid this problem, but it is germane to most other animal-based products, including dairy, beef, pork, and poultry. Prop 12, for example, applies only to uncooked cuts of pork and does not restrict the sale of cooked pork products such as lunch meat and canned pork, including many hams, or products that are mixed or not “cuts of pork,” such as sausages, ground pork, and pork hotdogs. It also excludes products containing pork mixed with other ingredients, such as pizza and soups.Third, my model addresses regulatory compliance that entails the conversion of capital inputs to meet a standard’s requirements and heterogeneity in farms’ costs of compliance with a regulation. This issue is important generally and especially for regulations that pertain to farm animal housing.
Farms in these settings will incur capital costs to achieve compliance and are usually heterogeneous with respect to the magnitude of these costs. This means that only the most efficient compliers will choose to meet a subnational standard. Although industry groups often oppose such regulations, I show that, as should be expected, heterogeneity in compliance costs means that the firms most efficient at meeting a regulatory standard will derive net benefits from its imposition. Fourth, I incorporate segregation and traceability costs along food supply chains. In contrast to laws regulating farm production within the jurisdiction, laws regulating production practices for foods sold within a jurisdiction necessarily require preserving the identity of compliant products through the supply chain, making segregation of compliant and noncompliant products and traceability necessary. Although the general implications of traceability and segregation along food supply chains have been studied , their roles have received little attention in regulations of farm animal treatment.The impacts of Prop 12 and related subnational regulations depend importantly on the cost increases they impose at different stages of the supply chain. Most such regulations to date apply to animal housing. Compliant firms will incur fixed costs of adopting housing to a regulation’s requirements, as well as additional variable costs for labor, feed, and veterinary services associated with deviating from conventional practices. Farms considering conversion must, thus, forecast whether a discounted incremental revenue stream from serving the regulating jurisdiction will be sufficient to cover the upfront and recurrent costs of the regulation. Prop 12 mandates that breeding sows be afforded at least 24 square feet of usable floor space and not be confined to stalls apart from short periods associated with farrowing and nursing. My analysis indicates that about 30% of breeding pigs were already confined in group housing at the time of its enactment, albeit housing that did not meet the Prop 12 standards. Most of these farms would be able to convert to Prop 12 compliance at lower costs than operations using stall housing. The marginal converting operation will just break even from doing so, while inframarginal converters will earn incremental profits from converting. As noted, regulations that restrict finished products that can be sold within the jurisdiction imply adjustments throughout the supply chain. Such regulations require segregation and traceability of products from compliant farms and compliant finished products throughout the supply chain, including creating new stock keeping units . Hog production involves three main stages: farrowing, nursery, and finishing, which may or may not be vertically integrated. Prop 12 applies directly at the farrowing stage, where breeding pigs produce piglets and feed them for about 21 days. Prop-12 compliant hogs, those that are born and weaned at farrow operations that comply with Prop 12 regulations, vertical grow weed receive no special treatment at the nursery and finished stages, but their identities must be preserved. Independent nursery and finishing operations must pay a higher price for pigs from Prop-12 compliant farrowing operations to cover the additional costs and to account for the higher value of some of the pork derived when the hogs are slaughtered. Operations further down the supply chain have no incentive to acquire these hogs unless they intend to preserve their identities and sell them into the segment of the supply chain producing pork products for California. Primary processors slaughter hogs and produce uncooked cuts of pork and ground pork products. These products are sold to wholesalers, retailers, and food service providers, or secondary processors. Compliant hogs and pork products must be segregated from non-compliant ones at any stage of processing and marketing. Operations that sell to retailers will have to create new stock-keeping units for compliant products, imposing another one-time cost at this stage in the supply chain. Operations may also need larger warehouse space or extra facilities and equipment to stock and distribute compliant products separately from non-compliant ones.
Importantly, an alternative strategy for primary processors would be to require all the hogs entering a specialized processing facility to be California compliant. This strategy avoids the aforementioned segregation costs at the plant level. However, unless all the covered pork products from the plant were channeled to the California market, this strategy raises processor costs in terms of having to pay farms to produce and supply compliant hogs even when their meat will not be sold in California. Indeed, this is the argument made by Petitioners in the case challenging the Constitutionality of Prop 12 before the U.S. Supreme Court . I argue this cannot be a viable competitive strategy. A decision by some processors to comply with Prop 12 in their entire operations creates an opportunity for competing processors to not comply, and, therefore, to avoid paying higher costs for compliant hogs, and being able to produce and sell pork for the rest of the country more cheaply than a compliant processor. Thus, compliant processors would not be able to compete on price for sales to the rest of the country relative to non-compliant processors, which destroys the economic viability of the strategy. California’s food retailers and food-service operators are, of course, also impacted by Prop 12. Indeed, the Proposition is directed toward these businesses. They are required under California regulations to procure covered product only from suppliers that certify that the pork has been produced to meet the mandate of Prop 12. As noted, most farm products can serve as inputs into multiple finished products. For example, the livestock products at issue with most animal housing regulations may be sold to consumers in either cooked or uncooked formats and may be mixed with other products in sausages, soups, prepackaged dinners, etc. Higher costs associated with complying with the regulation can be recovered only on the subset of products covered under the regulation. Products coming from compliant farm product but not covered under the law can receive no price premium because they compete with the same products from non-compliant farming operations. Coverage of finished products is a challenge for subnational regulating authorities because the wider the set of final products included under the regulation the greater will be the challenge to compliance and enforcement and the more economic actors that will be involved. Prop 12 provides an excellent example. It specifies regulated pork products as “whole pork meat,” defined to mean “any uncooked cut of pork that is comprised entirely of pork meat, except for seasoning, curing agents, coloring, flavoring, preservatives and similar meat additives” S. 25991. The uncooked pure pork products subject to Prop 12 regulation comprise about 60% to 65% of the meat from a hog. Secondary processors that procure uncooked pork and other products from primary pork processors and utilize them to make ground products, sausages, cooked hams, lunchmeats, soups, etc. are not subject to Prop 12’s regulations. The fact that only a subset of finished products that use the farm product input will be subject to the regulation raises interesting and unique economic issues that my model addresses. First, it creates an opportunity for consumers to avoid regulation-induced price increases by substituting non-covered products in place of those subject to the regulation. Second, it gives processors incentive and possible opportunity to adapt to a regulation by adjusting the share of covered and non-covered products produced from a given farm animal. In particular, compliant operations will have incentive to increase the share of covered product derived from an animal because non-covered products can capture no price premium.The model allows the adoption of restricted practices at farms that requires a conversion of capital and heterogeneity in compliance costs among farms. This conversion is a long-run response of farms and requires a fixed-cost expenditure to convert capital inputs such as reconfiguration of a facility. Farms must forecast the price premium they are likely to receive for their outputs if they convert to the restricted farming practices and determine if the premium will be sufficient to cover both incremental fixed and variable costs of producing the restricted product. Equilibrium conversion is defined by the farm that just breaks even on conversion, given the conversion costs. In the model, intermediaries use farm outputs to supply two retail products: covered product and non-covered product. The model allows variable proportions in the production of the two retail products, using the constant elasticity of transformation production possibility frontier. The intermediaries can adjust the production proportion between the two outputs in response to the relative price changes by the regulations.