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Weighing California’s Proposition 12 impact

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Decisions to build new or retrofit to meet Prop 12 requirements not without risks.

Everywhere you go, California’s Proposition 12 is on the mind of the pork industry. As of now, there are not a lot of answers about the new legislation, as the rules by the state of California have yet to be written and published. The effective date for supplying Prop 12 fresh pork products into California is December 31, 2021. So, what does that mean for your operation? Where does that leave the industry?

Let’s start with what we do know. Proposition 12 passed as a ballot initiative in California that sets specific requirements prohibiting the sale of eggs, pork and veal from cage confinement systems — regardless of where the animals were raised. For packers who want to continue to supply pork into California, sows can no longer be confined in gestation stalls. The new requirement bans the confinement of breeding pigs and their immediate offspring in areas with less than 24 square feet of usable floor space per pig. Read on for more of the possible ramifications of this upcoming legislation.

New sow farm construction

There is a common belief that the pork industry, after living through one of the toughest years in recent memory, will not grow its sow base. That isn’t necessarily the case. Proposition 12 is spurring some construction activity in the Midwest. There are ongoing discussions by some in the industry about the supply needs of California, which consumes 15% of U.S. pork. With that large of a market presence, we simply cannot ignore that market, even if we may not agree with the new law.

Not all production to fill this need will be new construction. Some owners are discussing retrofitting existing facilities to meet the space requirements. These decisions are not without risks to both the producer and packer.

What happens if Proposition 12 is overturned by the multiple court challenges they are facing? What if the rules are changed, impacting the type of facility you are building? As a producer and owner of the facilities, these are questions you need answered before you enter into a delivery contract with a packer. Additionally, with the added investment in a facility, it is reasonable to expect some sort of return. I would encourage everyone looking into capital improvements to not only cover costs but also a reasonable return on your investment.

Looking back to just over a year ago, the industry was trying to figure out if there was going to be enough packing capacity for the fall. All that changed with COVID-19. But, as of yesterday, harvest numbers are still at 490,000 head. We have very strong demand with a $114 cutout, which is fortunate. However, with these high prices will we continue to refrain from growing the swine industry to the point where we are maxing out our plant capacity?

Pork industry financial performance

Every quarter we compile information in a summary that gives us an indication on where the pork industry is at from a financial performance perspective. Through the first three quarters of 2020, we have seen a $3 per head loss, with owners’ equity falling to 56%. The only reason losses weren’t larger was the $14.85 per head hedge gains producers realized. Working capital per sow equivalent has been reduced from $1,200 during the end of the third quarter of 2015 to $800 for the period in 2020. With the challenges we had in 2020, we need to continue to build equity back into the average operation. We recommend closer to the 67% level seen during the same period in 2015.

 

Source: Steve Malakowsky, Compeer, who are solely responsible for the information provided, and wholly owns the information. Informa Business Media and all its subsidiaries are not responsible for any of the content contained in this information asset. The opinions of this writer are not necessarily those of Farm Progress/Informa.

 

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