Earlier this year, FMG summarized the issues pork producers were facing as a result of the passage of California’s Proposition 12. With January 1, 2022 around the corner, it is important to consider an update on the status of implementing Proposition 12 for pork producers.
On November 6, 2018 California voters passed Proposition 12, known as the Farm Animal Confinement Initiative, with 62.66% in favor and 37.34% opposed. This initiative was to establish minimum space requirements (based on square feet) for veal calves, breeding pigs and egg laying hens. It also banned the sale of veal, pork and eggs from animals confined to areas below the minimum required space.
California has 40 million residents and represents 15% of the US pork market.
What requirements did Proposition 12 establish for January 1, 2022?
Proposition 12 established January 1, 2022 as the date that:
Breeding pigs and immediate offspring must have at least 24 square feet of usable floor space per pig.
Farmers found in violation of the Proposition could be found guilty of a misdemeanor and fined up to $1,000 and/or serve up to six months in jail.
What happened after the voters approved Proposition 12?
The National Pork Producers Council (“NPPC”) and American Farm Bureau Federation (“AFBF”) filed a legal complaint on December 5, 2019 asking the court to invalidate Proposition 12 based on violation of the Interstate Commerce Clause of the US Constitution. The judge dismissed the case on April 27, 2020.
The North American Meat Institute (“NAMI”) filed a legal complaint on October 4, 2019 asserting Proposition 12 violated the Interstate Commercial Clause by erecting a trade barrier shielding California producers from out of state competition. On October 15, 2020 the court found against NAMI. This case worked its way through the court system on appeal, but on June 28, 2021, the US Supreme Court denied NAMI’s petition to be heard.
What is happening now with implementation of the Proposition 12?
The state of California was to have the rules finalized by September 2019, however, the first comment period did not end until July 12, 2021. As a result of this delay, published rules, including funding, enforcement, and other issues, were not available two years prior to the implementation which is still scheduled to begin January 1, 2022. When Proposition 12 was contemplated, it was expected that pork producers would have at least two years to comply with the regulations once finalized.
The California Department of Food and Agriculture (“CDFA”) revised and submitted proposed regulations for public comment, and provided for a 15 day comment period from December 3 to December 17, 2021.
A coalition of animal welfare groups (Animal Wellness Action, Animal Wellness Foundation, the Center for a Humane Economy, and Americans for Family Farmers) has filed a lawsuit in California state Superior Court in Sacramento challenging CDFA’s effort to implement the law. According to the lawsuit “CDFA’s proposed regulations conflict with the legislation implementing Proposition 12 by failing to account for the full range of harmful impacts of industrialized systems of animal confinement that have long dominated US meat and egg production.” In other words, the coalition does not feel the proposed rules go far enough.
The challenges the National Pork Producers (“NPPC”) and the American Farm Bureau Federation have filed with the courts remain alive, even though federal courts have upheld California’s ability to restrict its market access in other lawsuits. Indiana has joined a last minute appeal to the US Supreme Court.
California had until December 8, 2021 to respond to the NPPC’s lawsuit. As of December 13, 2021 the response has not been made publicly available.
Whether or not the Supreme Court of the US accepts the case will not be known until January 2022, which is after the January 1, 2022 implementation date contained in Proposition 12.
Because the CDFA has not released all final regulations, the pork producers are asking for a two year delay in implementation once the final rules are released.
What does this mean to pork producers and processors?
Pork producers are caught between unwritten rules and enforcement guidelines and the need to continue to sell their product. Producers have already needed to determine the costs to convert existing facilities to the new standards, and should have evaluated the cash flow impact of fewer animals. Producers and their lenders will need to be creative in developing ways to deal with the uncertainty and with the Proposition 12 rules once finalized, within the economic parameters of each pork producer or processor operation.
Processors will need to develop the systems required to track animals through processing, including storage and distribution by compliance to Proposition 12. Processors and producers will need to focus on the reporting requirements, rules, and regulations yet to be published to ensure that compliant and non-compliant pork are clearly identified. Some processors may elect to only accept compliant or non-compliant pork, and producers will need to be aware of those decisions to determine sale avenues for the producer’s animals.
Consumers in California are expected to experience higher pork prices. Some economists have estimated there could be a 60% increase in the cost of pork in California while the farm and food processing economy adjusts to these new rules.
Overall, Proposition 12 and similar measures in other states will result increased costs in terms of capital outlays and increased operating costs per animal. Producers, processors and their lenders will need to develop the plans to comply or evaluate the impact of noncompliance. The timeline has been tight even if the rules were finalized. With the revised rule comment period not expiring until December 17, 2021 and with the request to have the Supreme Court take up the challenge not being decided until sometime in January, there is a high level of uncertainty for pork producers and processors, and their lenders during the next quarter.