The Economics of Regulations of Hen Housing in California William Matthews University of California Agricultural Issues Center SAEA Annual Meeting February 8, 2010 Orlando, Florida

The Economics of Regulations on Hen Housing in California Prepared for Presentation at the 2010 annual meeting of the Southern Agricultural Economics Association Daniel A. Sumner, William A. Matthews, Joy A. Mench and J. Thomas Rosen-Molina Daniel A. Sumner is the Frank H. Buck, Jr. Professor in the Department of Agricultural and Resource Economics, University of California, Davis and Director of the University of California Agricultural Issues Center William A. Matthews is post-doctoral scholar with AIC. Thomas Rosen Molina is a research associate with AIC. Joy Mench is a professor in the Department of Animal Science at UC Davis.

Outline of Presentation California Treatment of Farm Animals Act Egg production and consumption in California Production costs of different hen housing systems Effects of new regulations on California shell egg industry. Effects of national regulations.

California Treatment of Farm Animals Act (TFAA) November 2008 general election. – California Proposition #2 “Shall certain farm animals be allowed, for the majority of every day, to fully extend their limbs or wings, lie down, stand up and turn around?” – Passed Date of Enforcement: 63.5% Yes January 1, % No

Administration of TFAA Regulations (California Health and Safety Code Section ) “a person shall not tether or confine any covered animal, on a farm, for all or the majority of any day, in a manner that prevents such animal from: (a) Lying down, standing up, and fully extending his or her limbs; and (b) Turning around freely.” For laying hens in California "Fully extending his or her limbs" means fully extending all limbs without touching the side of an enclosure, including, in the case of egg-laying hens, fully spreading both wings without touching the side of an enclosure or other egg-laying hens. “ “Turning around freely" means turning in a complete circle without any impediment, including a tether, and without touching the side of an enclosure.”

California Laying Hen Population and Egg Production,

Average annual number of laying hens and eggs produced in California and the United States, Year CaliforniaUnited States Average number of laying hens on hand 1 Eggs 1 Average number of Laying hens on hand 1 Eggs 1 ThousandsMillionsThousandsMillions ,1616,608255,83267, ,5266,606264,79070, ,1636,319270,90371, ,7576,082277,96473, ,1656,257280,02374, ,8315,439279,17474, ,2225,352283,67176, ,3365,082284,88876, ,3134,962289,41578, ,6105,290281,21177, ,2725,272276,07576,811 1 Includes hens and eggs for hatching purposes. Current estimates put hens and eggs for hatching at 2% of California egg production.

Top 10 Egg Producing States by Number of Laying Hens 2008 State Average number of table-egg laying hens Share of U.S. table-egg laying hens 1 Thousands (percent) 2008 Iowa 52, Ohio 25,779 9 Indiana 23,407 8 Pennsylvania 20,400 7 California 19,964 7 Texas 13,883 5 Florida 9,961 4 Nebraska 9,681 4 Minnesota 9,555 3 Georgia 9,300 3 Other States 81, U.S. Total 276, Includes only hens for table-egg production. Sources: USDA NASS 2008 Chicken and Eggs Summary

Estimated Shell Eggs Consumed in California,

Cage production system range and median Non-Cage production system range and median Cost Differential Non-Cage minus Cage System using mid-points Cost differential Non-Cage minus Cage System using low costs ($ per dozen) Pullets Feed Housing Labor – – Comparison of Production Costs Between Cage Production System and Non-cage Production System in Cost per Dozen

Sum of the itemized costs and difference at the mid-points Sum of the itemized costs and differences at the low costs Percentage cost difference based on the sum of items 0.345/0.595= 58% 0.20/0.45= 44% Total Cost – Percentage cost difference 0.305/0.745 = 41% 0.40/0.57 = 70% Cage production system range and median Non-Cage production system range and median Cost Differential Non-Cage minus Cage System using mid-points Cost differential Non-Cage minus Cage System using low costs ($ per dozen)

Market Effects of Layer Hen Housing Restrictions in California in the National Market for Eggs Price, marginal cost Demand U.S. Price Marginal cost/supply, CA Initial Q, CA Q, U.S. New marginal cost/supply, CA Q, eggs in the U.S.

Market Effects of Layer Hen Housing Restrictions in California in the California Market for Eggs Price, marginal cost Demand shell eggs in CA Price, shell eggs Marginal cost, CA producers Initial Q, CA producers Q shell eggs consumed, CA New marginal cost/supply, CA producers P shell eggs CA 2 P shell eggs CA 1 Shipped into CA

Market Effects of Layer Hen Housing Restrictions in California in the Market for California-produced Eggs Price, marginal cost Demand, CA produced shell eggs Price, CA shell eggs Marginal cost, CA producers Initial Q, California-produced shell eggs New marginal cost/supply, CA producers

A Bit of Log Linear Algebra (1)dlnQ d = η(dlnP - dlnB) (2)dlnQ s = ε(dlnP - dlnC) (3)dlnQ d = dlnQ s = dlnQ (4)ηdlnP – ηdlnB = εdlnP – εdlnC (5)dlnP = [-ε/(η-ε)](dlnC) + [η/(η-ε)]dlnB) (6)dlnQ = [-ηε/(η-ε)](dlnC – dlnB)

Q d - quantity of eggs demanded Q s - quantity of eggs supplied P - price of eggs η - price elasticity of demand facing egg producers ε - elasticity of supply B - additional willingness to pay for eggs produced using a non-cage housing system. C - additional cost of producing eggs using a non-cage system

Price and Quantity effects of a 20% cost increase with different elasticities and willingness to pay for eggs, California Demand elasticity facing CA producers η= -20 Supply elasticity ε=5 Supply elasticity ε=10 Cost shift dlnC (percent) Willingness to pay shift dlnB (percent) Price effect (percent) Quantity effect (percent) Price effect (percent) Quantity effect (percent) eliminate eliminate eliminate

Price and Quantity effects of a 30% cost increase with different elasticities and willingness to pay for eggs, California Demand elasticity facing CA producers η= -20 Supply elasticity ε=5 Supply elasticity ε=10 Cost shift dlnC (percent) Willingness to pay shift dlnB (percent) Price effect (percent) Quantity effect (percent) Price effect (percent) Quantity effect (percent) eliminate10.00eliminate eliminate13.33eliminate eliminate

Price and Quantity effects of a 40% cost increase with different elasticities and willingness to pay for eggs, California Demand elasticity facing CA producers η= -20 Supply elasticity ε=5 Supply elasticity ε=10 Cost shift dlnC (percent) Willingness to pay shift dlnB (percent) Price effect (percent) Quantity effect (percent) Price effect (percent) Quantity effect (percent) eliminate13.33eliminate eliminate16.67eliminate eliminate20.00eliminate

Price and Quantity effects of a 20% cost increase with different elasticities and willingness to pay for eggs, United States Demand elasticity η= -0.1 Demand elasticity η=-0.2 Supply elasticity ε=5 Supply elasticity ε=10 Supply elasticity ε=5 Supply elasticity ε=10 Cost shift dlnC (percent) Willingness to pay shift dlnB (percent) Price effect (percent) Quantity effect (percent) Price effect (percent) Quantity effect (percent) Price effect (percent) Quantity effect (percent) Price effect (percent) Quantity effect (percent)

Price and Quantity effects of a 30% cost increase with different elasticities and willingness to pay for eggs, United States Demand elasticity η= -0.1 Demand elasticity η=-0.2 Supply elasticity ε=5 Supply elasticity ε=10 Supply elasticity ε=5 Supply elasticity ε=10 Cost shift dlnC (percent) Willingness to pay shift dlnB (percent) Price effect (percent) Quantity effect (percent) Price effect (percent) Quantity effect (percent) Price effect (percent) Quantity effect (percent) Price effect (percent) Quantity effect (percent)

Price and Quantity effects of a 40% cost increase with different elasticities and willingness to pay for eggs, United States Demand elasticity η= -0.1 Demand elasticity η=-0.2 Supply elasticity ε=5 Supply elasticity ε=10 Supply elasticity ε=5 Supply elasticity ε=10 Cost shift dlnC (percent) Willingness to pay shift dlnB (percent) Price effect (percent) Quantity effect (percent) Price effect (percent) Quantity effect (percent) Price effect (percent) Quantity effect (percent) Price effect (percent) Quantity effect (percent)

Results of TFAA on California Egg Industry Majority of egg production will leave California January 10, 2010 Wall Street Journal (Lauren Etter ) “A year after Californians approved stricter rules on the treatment of farm animals, Idaho and other states are trying to lure away the Golden State's poultry and egg farmers with promises of friendlier regulations and lower costs.” “In Idaho, where there's currently little poultry production, Doug Manning, economic-development director of the town of Burley, said he wanted to offer incentives to poultry farmers as a way to increase jobs and tax revenue in the area. He has heard from a few California farmers who "are looking at some options," Mr. Manning said. "We said, 'When you're ready, give us a chance.' "