Smithfield cites ‘escalating’ costs in California for closure of Farmer John plant

Dive Brief:

• Smithfield Foods announced it will end operations at its Farmer John pork processing plant in Vernon, California, in early 2023. In a statement, Smithfield said it is “taking these steps due to the escalating cost of doing business in California.”  
• The Farmer John plant currently employs about 1,800 workers. Smithfield said it reached an agreement with the three unions representing the facility to compensate the workers, and will provide transition assistance, relocation to its other facilities and retention incentives to keep the plant running into early next year. 
• Smithfield said it would supply its customers in California with Farmer John and other brands and products from its facilities in the Midwest. The meat producer, which is headquartered in Virginia and owned by Hong Kong-based WH Group, is facing pressure to keep its prices in check at a time of high inflation and regulatory scrutiny.

Dive Insight:

The Farmer John brand has a more than 90-year history selling pork products in California. But according to Smithfield, which has owned the brand since 2017, having the state as a manufacturing base has come at a big cost.

Jim Monroe, vice president of corporate affairs with Smithfield, cited a range of costs that influenced the company’s decision to exit California. “Water, natural gas, electricity are significantly higher in California than our other locations,” he said. “Utility costs alone are three and a half times higher per head to produce fresh pork than in our other locations.

“Taxes are significantly higher, transportation costs,” he continued, and acknowledged that labor costs are higher in the state as well. 

“This is all about keeping food affordable,” Monroe said. “That’s one of our commitments. It’s just increasingly challenging to do that in California.”

Pork prices increased over 13% over the past 12 months, according to the Bureau of Labor Statistics’ Consumer Price Index report for May. The meat industry has also come under scrutiny by the Biden administration over higher prices and a perceived lack of competition.

In a statement, John Grant, president of the local chapter of the United Food and Commercial Workers International Union representing the union meatpackers at the Vernon plant, said Smithfield was exiting operations despite a “strong, mutually beneficial relationship with Farmer John employees and their union.

“A fair agreement that compensates their workers until next year has been reached, and we hope that another operator will take advantage of the highly trained and stable workforce that makes the Farmer John plant a productive and profitable part of Vernon’s packing infrastructure,” Grant said. 

The UFCW Local 770 was about to begin negotiations with Smithfield on a new contract, although Monroe said the company was “transparent” with labor representatives about its plans to close the plant. The union has had a contentious relationship with Smithfield. In June 2020, it called for the closure of the Vernon facility after at least 153 workers tested positive for COVID-19 during the early months of the pandemic. Smithfield and Tyson’s actions during the pandemic were also the topic of a recent House subcommittee report.

Smithfield also plans to trim its sow herd in Utah and said it is “exploring strategic options to exit its farms in Arizona and California.” The decision comes months after California’s Proposition 12 went into effect. The ballot proposition, which passed in 2018, bans the sale of pork and veal into California markets if animal housing does not meet minimum size requirements, and requires all eggs sold in the state to be sourced from cage-free hens. California represents about 15% of the U.S. pork market.

Monroe cited California’s regulatory climate, along with the higher utility costs, as part of its decision-making over the sow herds. “It’s a really prime example of a regulatory environment in California that also makes it challenging to do business efficiently,” he said.

While other processors like Hormel have said they would comply with Proposition 12, the Supreme Court agreed in March to hear a constitutional challenge to the law. This was in response to a petition filed by the National Pork Producers Council and the American Farm Bureau Federation arguing that Proposition 12 is unconstitutional because it burdens interstate commerce.