Wholesale prices for pork belly--the cut of meat used to make bacon--have surged this summer, nearly tripling since the start of June after hitting a multiyear low in May. Pork-belly prices were at $2.15 a pound recently, just shy of their highest level since last August. The run-up could soon pressure restaurants and supermarkets that have been stepping up bacon promotions.
"They're probably thinking twice about featuring a new bacon cheeseburger, bacon chicken sandwich or Baconator, or whatever," said Brian Earnest, lead economist for animal protein with agricultural lender CoBank.
Helping drive the price surge is an animal-welfare law in California requiring pigs to be given at least 24 square feet of pen space for their meat to be sold in the state, which accounts for roughly 15% of U.S. pork consumption. After facing years of legal challenges, Proposition 12 was upheld by the U.S. Supreme Court in May and went into effect July 1.
Pork producers initially held off on buying new products after the Supreme Court ruling because they were unsure about how the law would be implemented. "You had processors that didn't want to buy products for their freezers if it wasn't Prop 12 compliant," said Adam Samuelson, an agribusiness analyst with Goldman Sachs.
Then in June, California struck a deal with pork producers allowing them to sell their pre-existing inventory for the remainder of the year. Prices subsequently charged higher as buyers rushed to load up on supplies before the law came into full effect.
In its recent report, the National Pork Producers Council (NPPC), said that, based on estimates from building contractors and producers, the cost of constructing pig barns that are compliant with Prop 12 is at least $3,400 to $4,000 per sow. "This is about 25% more expensive than conventional group housing and 40% more than individual stall housing with the same number of animals," the report said.
"The Supreme Court's decision sets a precedent that could result in a patchwork of 50 different state regulations," NPPC said. "The burden of complying with California's regulations will fall on pig farmers outside the state, and increased costs will likely lead to much higher pork prices for consumers.
"Many farms do not have the capital available to make costly investments, especially in the midst of high production costs and other financial pressures. Prop 12 threatens to drive small- and medium-sized producers out of the market while disrupting the entire pork supply chain."
EDITOR’S TAKE:
What a convoluted mess, but it has to be sorted out, and soon. It certainly appears that consumers, especially in California, will be paying a lot more for their pork. At the same time, pork producers across the U.S. are facing the difficult decision of how, or if, they are going to comply with California’s Prop 12. In either instance, it creates a great deal of uncertainty. To the extent that pork prices remain elevated, this could provide additional revenue and investable funding for those pork producers who wish to comply with the law. We will have to see how all of this shakes out, but rest assured, we’ll keep you informed so you can make better business decisions!
