Financial Uncertainties for Pork Producers Affect Prop 12 Impact

Proposition 12, the controversial California law that dictates how much floor space sows need if pork from their offspring is to be sold in California, doesn’t appear to have had an impact on how many Midwest hog farms operate. 

At least not yet.

Experts say the reason may be simple: the timing. Once the dust settled around several legal challenges by pork producers, the survival of Prop 12 ended up coinciding with a downturn in hog prices. Few hog farmers in the Heartland, especially smaller independent producers, may be in a sound financial position to remodel or construct buildings that comply with the new measure even if they or their packing partners wanted to sell uncooked pork in California.

Lauren Servick, Minnesota Pork: “Most of the time, when I hear farmers tell me about a Prop 12 conversion, it’s maybe a site or two. And it’s usually an older site where something needed to happen anyway…I think with the economic situation that farmers are facing, the conversion doesn’t pay right now.”

Iowa State University economists say 2023 brought the worst farrow-to-finish returns they’ve tracked in Iowa, even eclipsing losses in 1998. The university’s Estimated Livestock Return model showed an average loss for hog producers in 2023 of $32 a head.

As grain prices have slipped in recent months, lowering feed costs, the hog industry has begun to see improvement to its bottom line. So far in 2024, returns ran from a loss of $41 a head in January to a profit of $9 a head in July. Still, on the heels of the rough financial stretch and with futures markets indicating losses again as the year comes to a close, farmers are unlikely to add any major expenses.

Lauren Servick, Minnesota Pork: “On average, if you were going to build a brand new Prop 12 site, you’re talking costs 40 to 43 percent higher. This is according to an Iowa State study… The upfront cost of just the building itself is significant but then you even see a reduction in the number of the pigs that come out of that site.”

When Market to Market asked Iowa DNR officials how many permits had been requested for remodeling or new construction for sow buildings in the nation’s number one hog producing state, they pinpointed just 12 since 2022. There are currently 362 active sow and litter operations across the Hawkeye State. DNR officials point out that producers who move panels around inside a building or reduce their sow numbers don’t have to apply for a permit. 

Calls to a few companies that remodel or build hog buildings in the Midwest provided similar anecdotal evidence: little to no activity this summer.

Considering that Californians consume about 15 percent of the nation’s pork, it could be that enough of the largest pork processors made changes and may already be meeting that California demand.  

A University of California at Davis agricultural economics professor says this idea is reinforced by what appears to be a possible leveling off of pork prices following an initial spike in the state’s grocery stores.

Daniel Sumner - University of California, Davis: “We observed prices in supermarkets in California and outside of California. And the products were always available, starting in October through March. There was no period where the supermarkets we were scraping said, ‘Oh, no pork this week.’.... Prices are high in California in general. Pork chops were more expensive in California before Prop 12 and after, but they seemed to be especially high during this adjustment period.”

Although the court challenges to the new measure appear to be settled following a May 2023 Supreme Court ruling upholding the new rules, there is some discussion about including language in the next Farm Bill to limit measures like Prop 12.

Daniel Sumner - University of California, Davis: “I’m not sure we’ve settled out yet. There is still enough going on in this and it’s just taken a long time. It’s partly because of the legal cases taking so long. It just makes it so uncertain for producers and for that matter, for the supermarkets and the restaurants and everybody else.”

Sumner wonders if California voters would have been smarter to take the state taxpayer money that will be spent on defending and regulating Prop 12 and instead just offered grants to pork producers.

Daniel Sumner - University of California, Davis: “We could have taken that money - roughly $300 million a year - and offered that to hog farmers. Say: ‘Here’s 300 million bucks that we’re going to pass out to hog farmers if they will promise they will have compliant housing.’ And…it would have been about twice as many pigs - mother sows - that would have been in California housing if we had done it that way.”

Gene Gourley, of Gourley Brothers hog farm in central Iowa, says although they are stepping away from raising sows for unrelated reasons, they had already decided against making changes.

Gene Gourley, Gourley Brothers - Webster City, Iowa: “I heard of most of the conversions going on in different regions of the country, either closer to California or just someone doing new buildings or things, which is very few in Iowa I think. It’s just too cost expensive for us to try and do it.”

Gourley pointed out that 85 percent of the nation’s pork doesn’t need to fit with Prop 12 so it’s too big a financial risk to make changes to his operation if the demand is already nearly being met.

Gene Gourley, Gourley Brothers - Webster City, Iowa: “If all the sudden, it exceeds that demand and the packer processor says, ‘Oh, we don’t need your pigs anymore.’ …Now I’ll probably go bankrupt because I made that investment. And so it’s kind of hard to know what that line is and who needs to do it and who is going to change. And the investment is so substantial that yeah you better be guaranteed with a contract of some sort. And that’s the challenge: just getting that cost recovery repayment from a processor. And…they don’t know how to sign a contract necessarily if they don’t know are we going to be able to sell it on the backside.”

By Colleen Bradford Krantz, colleen.krantz@iowapbs.org