Going Half Hog: CAFOs Downscale in the Face of Regulation

Hog farming, like other types of livestock production, has witnessed a sea change in the past fifteen years.

The average number of hogs per farm in the U.S. has quadrupled, production has splintered into specialized lifecycle phases, and temperature-controlled barns have replaced open-air pens. Perhaps most significantly, vertical integration has led farms to partner with meat packers to produce and sell hogs on contract rather than independently. Industry prospects for 2012 look sunny after a stretch of low prices and red ink a few years ago: Purdue University is estimating industrywide profits of $17 per head this year for 120 million hogs, up from $10 per head in 2011.

But maximizing profit can be tricky business in an industry where each unit of output has an undesirable output of its own: 1.4 gallons of manure per day, or about 1.2 million gallons for an average 5,000-hog farm over the six-month market cycle. In “Effects of Size-Based Environmental Regulations: Evidence of Regulatory Avoidance,” authors Stacy Sneeringer and Nigel Key show how some firms have managed to sidestep regulations designed to mitigate the effects of manure disposal.

Standard procedure calls for spreading manure from CAFOs (Concentrated Animal Feeding Operations) onto surrounding farm fields and storing the balance, the excess manure the soil can’t absorb, in on-site lagoons. Because large manure volumes combined with heavy rains, high water tables, or lagoon leaks can contaminate nearby streams, lakes, and drinking water, the EPA regulates CAFOs’ management and waste disposal under the Clean Water Act. Operations with more than 2,500 hogs face stricter regulations for waste disposal and engineering to prevent overflows in the event of major storms.

Sneeringer and Key show that the stricter regulations beyond the 2,500-hog threshold yield a higher-than-expected number of farms just below that level. Graphing the distribution of farms in nine major hog-producing states by size, the authors find a small but significant discontinuity at the 2,500-hog level: in 2007, 7.7 percent of operations that would otherwise have fallen into the 2,500 to 5,000 category were instead producing below 2,500—regulatory avoidance. Among new entrants, the rate was 10.5 percent, suggesting that startup farms avoid regulation more frequently because of their flexibility with capital spending.

There was a wide range in avoidance across states: in Ohio and Missouri, the avoidance rate hovered around 20 percent for operations that would fall in the 2,500 to 5,000 category. In Nebraska and Wisconsin, the figure was less than 3 percent. One weakness in the findings, however, is that the authors cannot attribute the avoidance to any specific regulation. The states interpret, implement, and enforce the federal rules, so it’s not obvious what drives the differences.

The idea that firms would strategically adjust to avoid the costs of regulation is not surprising, but regulators might find the state-by-state avoidance breakdown useful in analyzing the relative costs of compliance for each state, and in designing regulations that prevent avoidance.