Whether you raise fluffies in cages with no chance for exercise, huggies, or a happy life, depends on what you intend to do to those fluffies. I would not raise meat fluffies this way; the lack of exercise will leave the meat underdeveloped and stringy and the utter misery of the fluffy will leave the meat distressed and inedibly sour. However this is a fine state for harvesting other products from the fluffy: tears or milk while the fluffy is alive, fur or tallow after the fluffy is harvested. There are of course rumors that the feces, urine or other bodily fluids of the fluffy are also suitable for harvest this way, but we at the FAA have not been able to confirm this.
If you are trying to discipline a smarty by feeding it fecal matter, then we would advise against using that smarty’s tears or (if female) milk. But, there are other ways of disciplining smarties. The usual approach is to simply harvest them immediately, but many fluffherds also like to harvest only the “oysters” of the smarty and then let it go back into the herd. (More on Fluffy Oysters here: Ask FluffiesAreFood Vol 1 #21)