This model incorporates segregation costs in the processing and marketing sector under regulations. The regulations of interest are imposed at the point of purchase within the regulating jurisdiction, so the identity of compliance must be preserved at all stages along the supply chain. For traceability, segregation between the restricted products and the other products is required. The segregation costs will be transferred mainly to final consumers of covered products in the regulating jurisdiction through a higher retail product price. The model yields several interesting results. First, the more adoption there is, the higher the farm compliance cost at equilibrium. Second, restrictions raise profits for some inframarginal adopters whose compliance costs are low. Third, restrictions have spillover effects on the unregulated share of the market. Fourth, processing and distribution costs are higher for products covered by regulations, and the magnitude of incremental costs is affected by the size of the regulated jurisdiction. Fifth, competition implies that the cost increases must be borne fully by covered products, and the product coverage of regulations affects its magnitude.The parameters of the primary supply and demand functions were calibrated such that the functions fit the 2018 market values for North America, based on Canadian and U.S. government statistics, vertical air solutions and have the corresponding price elasticity given those values. I used a price elasticity of supply of hogs at the farm of 1.8 from Lemieux and Wohlgenant , which was used in subsequent work .
To parameterize the primary demand functions, I began with a base retail price elasticity of demand for all pork of -0.68 from Okrent and Alston , a value that compares closely to values of -0.69 and -0.79 used by Buhr and -0.65 reported by Wohlgenant and Haidacher . The demands for covered and non-covered pork products will be more price elastic than the demand for pork as an aggregate category based on consumers’ willingness to substitute between the two types of pork products in response to price signals. After reviewing the relevant literature, I chose a base value of -0.9 for covered pork and -1.1 for non-covered pork. Given Okrent and Alston’s estimate of the price elasticity of demand for all pork and the market shares for C and N pork, these values imply a cross-price elasticity of 0.36 for N pork demand in response to a change in the price of covered pork and a cross-price elasticity of 0.26 for C pork demand in response to a change in the price of non-covered pork.Based on the size of the California pork market relative to the total market for covered pork products produced in North America, about 7% to 8% of North American sow housing needs to be compliant with Prop 12 standards to meet California’s demand. Generally, compliance would be less costly for farms already using group housing than for farms using gestation stalls. Therefore, Prop-12 compliant farms will mostly come from the set already using group housing. Hence, the relevant one-time cost of conversion to Prop 12’s requirements is that which applies to group housing operations. Variable costs for group-housing operations that become Prop-12 compliant are also compared with those that remain non-compliant.
Based on information from the industry, about 20 square feet of usable space per sow is allowed among typical operations using group housing, with some variation below that space per sow. Capital costs of housing per sow for those mostly likely to convert will, thus, rise by about 20% to increase the space allowance per sow from 20 to 24 square feet. Based on farm cost data , the implied increase in capital costs were assessed to be $3 per piglet produced in a farrowing operation, when converted to a marketed weight basis this corresponds to in my model. As noted, compliance costs vary across farms based on farm-specific characteristics such as housing facilities and managerial expertise. Given that less than 10% of North American hogs are destined for California consumption, I assumed that farms covering roughly 30% of the total North American sows might seriously consider the option to produce Prop 12-compliant sows. I use $2 per pig as the lowest conversion cost and $5 per pig as the cost for the 30th percentile of farrowing operations . The calculated value for group housing with 20 square feet per sow, therefore, is consistent with the lower 10th percentile of the uniform distribution. Note that hog farms with a higher cost of conversion, say those using gestation stall housing, are irrelevant to the calculations because they are far outside the range of farms that might convert to compliance.Prop 12 raises variable costs per pig produced in several ways. These include higher sow mortality, lower farrowing rates, fewer live pigs per sow, higher veterinarian costs, and higher farm labor costs all assessed on a marketable per pig basis. To compare costs, I used as the baseline costs calculated by university specialists .
Based on productivity information from producers, including declarations from dozens of producers included in the Petitioners Complaint in UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALFIORNIA CASE NO. 19CV2324W AHG National Pork Producers Council and the American Farm Bureau Federation v. Ross Dated: December 5, 2019. Given that California comprises less than 10% of the North American retail pork market, many primary processing operations will choose not to acquire the costly Prop 12-compliant hogs. These plants will avoid added costs of identifying, segregating, tracing, and labeling the compliant pork separately from the rest of their production. Most primary processing operations that do acquire and process the more expensive compliant hogs will also continue to utilize non-compliant hogs to exploit economies of size,access hogs within a reasonable distance of the plant to reduce transport costs and utilize plant capacity efficiently. These firms thus incur additional costs for identification, segregation, and tracing to enable sales of compliant pork into the California market. Such costs include separate holding pens, more complicated and less flexible scheduling, interruption in plant operation between processing the compliant and non-compliant hogs, additional storage capacity so that the up-to-double SKUs of fresh pork can be kept in distinct lots, a more complicated labeling process, and more complex shipping of labeled products. The costliest among these factors is likely to be the interruption of plant operations and reduced throughput during the change-over from handling compliant to non-compliant hogs. Compliant hogs will be processed on different days and/or at different times on a given day from other hogs to assure that non-compliant pork is not comingled with uncooked cuts of pork that are destined for California. Further, my simulation projects that the average price of uncooked cuts of pork in California will rise by 6.9%, or about $0.23 per pound . California consumers will buy 6.2% less of the covered pork products as a consequence, given the baseline price elasticity of demand. Accordingly, vertical weed grow the share of North American hogs that provide pork products destined for California will decline from about 7.6% to 7.1%.6 This reduction in the share of market hogs destined for California drives much of the small impact of Prop 12 on the rest of the North American market. Because covered pork products cost more in California post Prop 12 and consumers buy less of it, less of North American pork production is used to feed California with Prop 12 than without Prop 12 regulations in place. This means that more of the pork production capacity is available to supply the rest of the market, causing non-compliant hog prices to fall by about 0.3% . Retail prices for non-compliant pure pork products to decline by about 0.2%. The lower consumer price causes a small percentage increase in quantity demanded, but, given that the non-California share of the market exceeds 90%, this increase largely offsets the decrease in consumption in California, so that the model predicts only a 0.2% decline in hog production due to Prop 12.
As noted, the more efficient operations that convert to Prop 12 compliance can expect to increase profits from conversion, while marginal converters should on expectation break even from conversion. The model estimates that converting operations gain about $0.2 million annually in producer surplus in 2018 dollars from converting to compliance with Prop 12 and supplying pork to California. Those that continue to produce for the unregulated market will lose a small amount of surplus due to the slightly lower hog price. I estimate that this aggregate loss to those that do not supply the California market about $44.8 million annually. The resulting in a net annual loss to producers of about $44.6 million or about $0.16 loss per hog. Despite significant industry opposition, Prop 12 will not impose much negative impact on producers on average. The California covered pork price increase implies that California consumers of covered pork products will have a $258 million consumer surplus loss annually through paying more for less covered pork. However, the higher price of covered pork causes an increase in the California demand of the substitute, non-covered pork. California buyers of non-covered pork are now willing to pay more for non-covered pork and quantity demand rises by about 2.4%. With our base-case parameters, the consumer surplus gain from the shift in demand for non-covered pork is about $69 million annually. Therefore, the total annual consumer surplus loss for California consumers of the two types of pork is about $188 million or about $4.70 each if all Californians were to eat pork. The per capital impact of Prop 12 on pork consumers outside California will be minimal due to the tiny projected decline in prices uncooked pork cuts outside of California and essentially no change in the price of non-covered pork products.The model assumes that the implementation of Prop 12 does not shift California’s demand for covered pork products. The projected decrease in consumption arises from movement along the static demand curve due to higher prices. The resultant decrease in California quantity of pork demanded causes the small decrease in hog prices for non-compliant producers and loss of producer surplus. It is possible that Prop 12 or animal welfare regulations more generally could increase demand for the covered products. For example, some non-consumers of pork in California could become consumers and some who consume pork only occasionally could become more regular consumers upon implementation of Prop 12 because they believe pork for sale California is now more humanely produced. I explore this potential demand expansion by considering a rotation of the demand function of covered pork in the California market. This is implemented simply by adjusting the coefficient on the covered pork product quantity term in equation . I rotate this demand curve enough to generate sufficient increases in prices and quantities at the new equilibrium such that the producer surplus of non-compliant hog producers is unchanged under Prop 12. The full results from this exercise are shown in Table 4.2. The large and important changes are that the quantity of California uncooked pork now rises by about 8.3% rather than falling by about 6.2% as was the case in the Table 4.1 results. Also, the quantity of non-covered pork in California falls by 3.2% rather than rising by 2.4% because of the shift in preferences for covered pork production under the assumption that consumers now believe such pork is more humanely produced. Notice also that producers that supply the California market for covered products gain even more producer surplus so that producers as a group gain about $4.6 million per year.Although one major requirement of Prop 12 is no use of gestation stalls for sows that produce pigs destined to supply the California covered pork market, my work shows that Prop 12 will have negligible effects on the conversion of stall housing operations. Given that about 30% of breeding pigs in North America are already confined in group housing, and only about 7-8% of the North American hog production is needed for the California market, operations converting to Prop 12 requirements will come from this group of producers. Prop 12 will provide more space to breeding pigs in those operations that convert to compliance because the space allowance per sow in typical group housing is smaller than California’s 24 square feet minimum requirement.