Feathers Are Ruffled Over California's Chicken Regulations

You gotta scramble some eggs to effect industry change.

Feb 10, 2014 at 9:51PM

Because of the Constitution's Commerce Clause regulating interstate transactions, it certainly seems California will lose a legal challenge to its chicken regulations after Missouri sued the state and asked a federal judge to strike them down. But it will undoubtedly be the Show-Me State that winds up with egg on its face.

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Source: SXC.hu.

Now, most people probably learned about the Commerce Clause when the Obama administration creatively expanded its definition by applying it to the Affordable Care Act to force individuals into buying health insurance. The Supreme Court, however, rightly rejected the president's argument, noting that the purpose of the clause was to regulate existing commerce between the states, not the creation of new commerce.

And that's why a California law regulating the sale of eggs produced beyond its borders will fail; it's exactly the kind of regulation the Commerce Clause prohibits. In the end, though, as animal rights activists get more companies to agree to humanely treat their animals, Missouri will still lose the war despite having won the battle. 

California enacted a regulation that mandated egg-laying chickens be housed in cages that allow them to spread their wings. Because its egg farmers complained they'd be subject to "unfair competition" from farmers in states without the same burdensome laws, California banned the sale of all eggs regardless of where they came from that weren't raised in the same conditions it demanded. Missouri charges in federal court the ban imposes new requirements on out-of-state farmers, which the Commerce Clause prohibits.

According to the lawsuit, Missouri farmers produce about 1.7 billion eggs annually, with about one-third of them, or some 540 million eggs, sold in California. While it says the state is the second largest egg producer behind Iowa, Cal-Maine Foods (NASDAQ:CALM), a Mississippi-based producer with operations across the Southeast and the only publicly traded egg farmer, is the largest producer and marketer of shell eggs in the United States, selling more than 948 million dozen shell eggs in 2013.

According to SourceWatch, Cal-Maine contributed $500,000 to defeat the California measure in 2008, and it's come under scrutiny before for its practices. Last year it settled a lawsuit for $28 million over charges it raised prices by killing off its flocks and limiting the supply of eggs.

Yet regardless of whether the current lawsuit is successful, it won't be California, Missouri, or Cal-Maine that determines how the chickens are housed. As we're seeing all across the food processing industry, the distribution chain is having the final say. As pressure is brought to bear on them by animal rights organizations, they're lobbying for change from their suppliers.

Tyson Foods (NYSE:TSN) recently became one of the latest meat processors to announce it was phasing out the use of gestation cages for hogs, the confining cages that prohibit breeding pigs from doing anything but standing still for the duration of their four-month pregnancy. Then after the sow gives birth, it's reimpregnated and returned to the gestation cage again.

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Source: SXC.hu.

But it was pressure from fast-food restaurants, grocery stores, and food-service giants like Sysco that demanded their suppliers end the use of the cages that finally forced their hand. Now Tyson, Smithfield Foods, and Wendy's (NASDAQ:WEN) have also demanded gestation cage-free pork from its suppliers, and Wendy's just said it will also demand greater transparency from them, requiring they undergo annual audits that examines their housing, transportation, holding facilities, and processing procedures.

Similarly, Tyson's cattlemen and chicken farmers will also need to ensure their herds and flocks are treated better, as it contends it's a three-protein company and it's taking a holistic approach to animal welfare.

While egg farmers in Iowa, Missouri, Mississippi, Arkansas, and elsewhere may escape California's strictures this time, it will eventually come down to whether the marketplace sees the requirements as reasonable, making it unnecessary for states to dictate rules or creatively write laws to have them put in place.

Birds of a feather
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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Sysco. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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