Voters and government are increasingly placing restrictions on methods of pork production, including laws to reduce or eliminate the use of individual stalls for housing sows and gilts in the breeding herd.
The European Union plans to phase out individual sow stalls by 2013. Legislation in Florida, Arizona, Oregon and Colorado has banned or will ban gestation stalls in the coming years.
In November 2008, California voters approved Proposition 2, which restricts the use of sow gestation stalls; other states may follow.
Relatively little analysis has been done on the economic impacts of transitioning from stalls to pens. So in an effort to examine the economic costs of transitioning the breeding sector of the U.S. pork industry from gestation stall facilities to group housing, a comparative study was requested by the Joint Sow Housing Task Force of the National Pork Board and the National Pork Producers Council.
Are Pens Really Better?
A primary objective of voters, as well as some producers favoring these policies, is improved sow welfare. Regardless of economic considerations, it is not yet clear that the elimination of stalls achieves that objective.
A review of prior research on sow productivity and welfare suggests that the type of system does not necessarily determine sow welfare. For example, stalls allow for individual sow management and remove the potential for sow aggression and injury, but sows are incapable of full movement. Pens allow for greater mobility, but also allow sow aggression that can result in injury and also extreme variation in body condition between aggressive and submissive sows.
Prior research has also found no significant productivity differences between housing sows in stalls vs. pens. When asked in a survey if pen housing affected the level of productivity in a commercial setting, producers with both systems said they found no consistent differences. However, respondents indicated several key issues would affect group housing productivity:
Producers must learn to manage sow group dynamics.
Some stall use must be available after breeding for proper embryo implantation.
Base Assumptions for Economic Analysis
Stalls are needed to isolate sows when they are injured, in poor condition or otherwise fall out of groups.
Feeding for management of body condition variation is critical.
Space allocation per sow relative to pen size is critical.
The potential for catastrophic productivity losses are greater with pens.
In summary, the surveyed producers suggested there are significant risks posed by transitioning the industry from stalls to pens in a short time frame due to variation in management and husbandry skills, which are more important to success with pen systems.
The following economic analysis is based on the economic impact of transitioning from existing gestation stall housing to group pen housing under a regulatory mandate.
Two major cost categories are analyzed:
The capital costs associated with investing in refurbished or new buildings and equipment, including the opportunity cost of refurbishing a building that has not reached the end of its useful life, and
The potential differences in sow and pig productivity during the transition.
Two alternative pen systems are simulated and compared to a conventional gestation stall system. One is a trickle-feed system with small pens of six or fewer sows, and the other features an electronic sow feeding (ESF) system with large pens of 50-60 sows. While there are many pen-based variations for housing sows, these two seem to capture most of the variations between systems.
The trickle-feed system is simpler to operate and implement as a retrofit, may require additional barn square footage and relies on small pens. The ESF is technically more sophisticated with the potential for greater management and maintenance issues, but allows for sows to be housed in large pens, utilizing the same square footage as existing stall systems.
The capital replacement cost is modeled so that the additional cost of retrofitting or replacing an existing barn prior to the end of its depreciable life (about 25 years) results in increased capital costs, but no improvement in revenue is realized if productivity is unchanged. This is modeled as an infinite horizon net present value (NPV) problem.
The NPV method compares alternative systems by standardizing all net cash flows to a single value in current dollars. This allows for comparison of projects with different life spans, as would be the case with replacing different ages of stall facilities.
Estimating industry-wide impacts requires an estimation of the number of barns to be replaced or retrofitted and the average age of the barns to determine their useful life lost. Based on USDA data, it is estimated that 1,725 barns with 1,200 sows would need to be transitioned, and 1,370 barns with 2,400 sows would also need to be transitioned. No information is available on barn age, so the ages of existing barns are assumed to be uniformly distributed over 25 years. That is, 1/25th of barns are one year old, 1/25th are two years old and so on.
Three scenarios are analyzed:
The productivity costs are unchanged between stall- and pen-based gestation, and the only cost is the capital cost of retrofitting stall facilities or building new pen systems;
In addition to the capital costs, it is assumed that productivity decreases for two years during the transition as people adapt to pen systems (the most likely scenario); and
The productivity decreases are persistent for the life of the facilities (the worst-case scenario).
Barn-Level Economic Impacts
The most likely impacts of a transition to pen housing, assuming a uniform distribution of the age of existing facilities at the time a regulation is initiated, is shown in Table 1. Industry losses will range between $1.87 billion and $3.24 billion. However, if productivity is reduced throughout the life of the barns, then costs more than double to about $7.3 billion.
Several factors affect the level of these losses. To evaluate the relative impact of these variables, a sensitivity analysis was completed, varying the level of key input variables used in the simulation. Figure 1 shows the relative impact of a 10% change in these input variables on the net present value producers will receive after the transition.
As expected, productivity variables such as total pigs born per litter and farrowing rate have the greatest impact on profitability. Therefore, it is imperative to determine expected productivity impacts prior to implementing regulations. Capital costs are not as crucial, because the one-time transition is eventually amortized from the production system.
As the transition to group housing drives production costs higher, hog and pork prices are expected to increase. A market supply and demand model, including trade, is used to analyze the market level price/quantity adjustments. Table 2 shows the impacts on consumer and producer surplus, which is a net measure of the price increase and quantity reductions from market response to higher costs of production.
The key implication is that under the most likely scenario (Figure 1, Scenario #2), pork producers lose $1.5 billion dollars, less than half the approximately $3.2 billion they lose if market adjustments are not accounted for. Typically, cost increases in a commodity market are passed on to consumers who bear most of the cost increases. Therefore, the additional cost to consumers is estimated at $5 billion.
Beef and chicken producers benefit because consumers switch to these meats and their prices rise as well. A similar substitution effect occurs for imported pork products, which increase to replace the more expensive domestic pork products. Consequently, regulations to restrict sow housing will place the U.S. pork sector at a competitive disadvantage to other domestic meat sectors and to international pork production if they don't adopt similar standards.
A common argument is that increased animal welfare is demanded by consumers and they will compensate producers for the effort by paying higher prices. As shown, the market alone will not compensate producers; to do so would require an additional 25% increase in consumer willingness to pay for U.S. pork products from sows housed in pens.
The problem is that only a small subset of consumers is actually willing to pay a large difference for animal-friendly practices. Consumers not willing to pay for these practices are essentially taxed by a regulation that mandates costly production practices such as the transition to pen housing.
Any regulation that mandates transitioning existing stall-based to pen-based housing prior to the end of the useful life of existing facilities will result in increased costs to the pork industry. Ultimately, these costs will be borne by consumers.
These costs can be mitigated by allowing producers to transition barns at the end of their useful life, but even those policies will create structural competitive differences because facility ages vary by region and firm. Producers with older facilities will benefit more, relative to those with newer facilities.
More importantly, regions, including international competitors who do not have such restrictions, will gain even greater relative cost advantage.
Given the results showing the tremendous cost potential of any change in productivity, it should be determined if there are, in fact, no reductions in productivity or sow welfare due to pen housing. Further research — preferably commercial-scale research — is needed which should include an evaluation of the difficult-to-measure management quality implications. We have the potential to significantly reduce sow welfare if pen systems cannot be effectively managed when implemented on an industry-wide basis.
Finally, to reduce costs to consumers and producers, perhaps the best alternative is to develop labeling and certification programs that allow producers and consumers who share concerns about gestation stalls to more effectively participate in market-oriented transactions. This would avoid the aggregate cost impacts of a large-scale, mandatory transition, and allow consumers to target their spending to preferred animal rearing methods and products.
Full Report Posted
To obtain copy of the complete 72-page report, “Economic Impact of Transitioning from Gestation Stalls to Group Housing in the U.S. Pork Industry,” go to the National Hog Farmer web site, www.nationalhogfarmer.com; or contact Brian Buhr, Department of Applied Economics, University of Minnesota, 1994 Buford Ave., St. Paul, MN 55108-6040. Phone (612) 625-0231 or e-mail [email protected].