Pork Dominoes
Infrastructure upgrades are on the horizon for North America’s pork producers. Sliding profits and new rules are shuttering operations, making way for system redesign.
First, some terminology:
A sow is a female hog. Sows are the primary producers of meat in the pork supply chain. The owners of the animals and the barns control how pigs are raised.
When pregnant, i.e. gestating, industrial pork operations use ‘gestation crates’ to house sows in narrow stalls as shown below. About a week before giving birth, sows are moved to ‘farrowing crates’, where they birth and nurse the newborn piglets. Farrowing crates separate the sow from the piglets, and prevent most contact apart from nursing.
According to the RSPCA in the UK, “the routine use of farrowing crates has been banned in Sweden, Norway and Switzerland with Austria moving to the use of crates for shorter periods only by 2033. Denmark is planning on having 10% free farrowing accommodation by 2020, though this would still leave 90% of sows in farrowing crates and their use is still widespread in many other countries around the world.”
This is about to change in North America, as California’s Prop 12 will ban the sale of some pork from operations without expanded crate space. Increasing pen sizes will represent a new cost to pig and pork producers, and the differentiation of product origin will result in shortages, surpluses, and variable prices.
Snapshot of the Pork Industry Currently
Pork industry restructuring has begun. The sudden and unprecedented reversal of fortunes at mega-meat company Tyson Foods have been attributed to various factors:
Feed costs,
Supply chain bottlenecks,
Heat waves,
Pandemic recovery measures,
Worker absenteeism,
Decreased export market demand…
And now, costly new regulatory requirements.
Plant closures are underway, at Tyson as well as Olymel and HyLife, two sizable corporations in the middle of the industrial pork supply chain. Thousands of layoff notices have been issued across North American meat operations, in an effort to cut costs and reduce the over-supply weighing on prices and production margins.
Breakdown of Production
The North American pork industry is mostly consolidated and commercially based on end-to-end control, through a combination of supply chain ownership and production contracts. Canadian and U.S. meat businesses are structured a little bit differently, but they are completely intertwined.
According to the provincial government, “Manitoba is the largest pig producing and exporting province in Canada comprising approximately 30% of all pig production nationally. Hogs are the second largest source of farm cash receipts in Manitoba.”
But pigs are not pork until they are processed, packaged, and sold. Sales of pork from some of Manitoba’s pig farms ultimately take place elsewhere.
Pigs move from Farrowing Barns as weanlings, i.e. piglets that are transitioning from nursing on their moms, to eating on their own. Weanlings are kept in Nursery Barns from the age of 3-4 weeks until 5-8 weeks of age, when they move into Feeder Barns where they reside until they reach market weight.
At that point they are ready to slaughter and to be processed into pork products. Feeder Barns are often hog production operations in the U.S. Midwest, who in turn, ship pork into California.
Toppling the Dominoes
It appears as though the customers of Manitoba’s piglets will be banned from selling some products under California’s new regulation unless suppliers refit their barns with larger gestation and farrowing pens. Hog and pork supply chains across the developed world are facing the same pressures.
When it comes to new regulations for agriculture and food, it is important to understand ‘the California effect.’ According to this New York Times magazine article, “California has been so successful at bending national policy in its direction that academics have taken to calling the phenomenon the California effect. From labor and consumer protections to corporate governance, energy and animal-welfare measures, California’s laws are the most widely copied in the nation. Most corporations can’t afford to ignore its mammoth market (its $3.6 trillion economy is the world’s fifth-largest, exceeding India’s); they often end up adopting California’s rules across the country because doing so is cheaper than trying to craft two separate sets of products and policies.”
Mainstream agriculture is responding as usual to the Supreme Court’s ruling to uphold Prop. 12, with myths and dire warnings about farmers going under and prices going higher. The truth is that making this accommodation in Canada is unlikely to topple many if any producers, because they’re mostly Hutterite farms with free labor, or vertically integrated brands like Maple Leaf Foods.
Building Value and Integrity
In the otherwise dismal quarterly earnings call, Tyson CEO Donnie King shared, “One bright spot was Tyson’s prepared foods business, which produces brands like Jimmy Dean, Hillshire Farm, Ball Park and Sara Lee. Sales volumes were flat but prices rose 2% and Tyson said its products gained market share. Branded food is our best opportunity to drive faster growth, higher margins and stronger results”.
Branding is – across commodity agriculture – a fast way to deploy marketing expenditures to maintain market share. Analyzing and ground-truthing label claims can become a moat for food companies to protect against regulatory threats, and to deliver integrity to consumers, all at once.