Economics of Mandates on Farm Practices: Lessons from Regulation of Pork Sold in California

• Agricultural Economics Workshop

Date and Location

Thursday, October 8, 2020, 4:10 PM - 5:30 PM

Abstract

Regulations of food product availability tied to farm practices affect market prices, quantities and welfare differentially. Impacts depend primarily on magnitudes of farm, processing and distribution cost increases. However, particularly for processing and distribution, these costs depend on how much of the relevant market the regulations cover, and the costs of segregation in the supply channels. The product coverage of regulations also has major implications. Regulations may raise farm costs that apply to a subset of covered consumer products and other (non-regulated) products derived from the same farm output. We illustrate these principles with the important case of regulations on sales of pork products in California that are tied to mandates about how the breeding pigs are housed. The housing rules apply primarily to sows that farrow pigs that produce pork destined for California buyers. Two specific features of these regulations affect impacts: (a) California comprises about 10% of the North American pork market and it is costly to segregate the hogs and pork destined for California from the rest; and (b) the regulations cover only some of pork products from each hog. The result is that processing and distribution costs are higher for products covered by California regulation and competition implies that the cost increases must be borne fully by covered products. Simulations using realistic parameters show that: (1) compliant farrowing operations incur higher costs; (2) compliant processing and distribution operations incur higher costs; (3) covered pork products have higher retail prices reflecting these costs; (4) with higher prices, California consumers of covered pork products have substantial welfare losses; (5) impacts on non-covered prices and quantities are very small; and (6) impacts on consumers outside California are very small.