Food Safety Concerns. Food Safety Concerns. Food Safety Economics and Business Issues: Case Studies for Homeland Security.

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1 Food Safety Economics and Business Issues: Case Studies for Homeland Security Dr. Victoria Salin, Associate Professor Texas A&M University Guest Lectures for AGEC 689 Homeland Security Economics Issues and Implications for Policy Design Feb. 19 and 26, Food Safety Concerns In the news: P.B. 2 Food Safety Concerns In the last couple decades: Mad cow FMD in Europe Jack-in-the-Box Hudson Foods Burger King Odwalla 3 1

2 What is the Appropriate Response? Move on (acceptable risk) Private sector response Voluntary product recall Assurance via certification Contracts over tests or processes Public sector response Mandatory HACCP (process control) Mandatory pathogen reduction (testing/inspection) 4 Food Safety Concerns Almonds? 2001: Salmonella outbreak in Canada. Linked to a specific retailer who sold raw almonds. Traced to 3 specific orchards. 2004: Salmonella small cluster in Oregon. Linked to a retailer. One large handler initiated product recall: 1) a partial recall of 5 million pounds, from 8 export markets 2) a full recall of 15 million pounds regardless of their shipment destination. Never traced to grower(s). 5 Supply Chain: Economics and Business Growers n=6,000 Avg. revenue = $261,248 Huller-Shellers n=250 Handlers n=109 Brokers 65% Direct Ship 35% Extent of handlers supply chain relationships or more Million Pounds n firms % crop Concentration of handlers 6 2

3 Restaurant Supply Chain Vulnerability FDA: Onions Unproven as Culprit So Far An E. coli outbreak has sickened 62 people in six states, mainly in the Northeast, but federal officials say they can t confirm or rule out any particular food item, such as the much-rumored green onions. Unlike an earlier outbreak, which showed during the early stages that a disproportionately high number of patients ate spinach, people infected this time had only one thing in common, at least for now: they ate at Taco Bell restaurants, of Yum Brands Inc. Tests conducted by Taco Bell and several state labs indicated that green onions might be the culprit, but no federal labs can confirm it and additional tests are needed, says officials form the Food and Drug Administration and the Centers for Disease Control and Prevention. The FDA, which regulates vegetable products, has talked to Taco Bell and its suppliers in an effort to trace back where the products on their menu came from. Those include not only green onions, but tomato, lettuce and others. The Agriculture Department, which regulates meat products, is also working with the FDA, CDC, states and the restaurant to investigate the outbreak. Federal official warned that more cases may still show up. The E. coli bacterium causes diarrhea but most adults can recover from it within a week. Some individuals, especially children and the elderly, can develop kidney failure and die from it. On Wednesday, Taco Bell said it removed scallions removed from its 5,800 restaurants. That move didn t stop lawsuits from coming. Earlier today, Seattle lawyer Bill Marler filed one against the company and a grower of green onions on behalf of a Pennsylvania resident who became ill. Jane Zhang (WSJ.com, Dec. 8, 2006) 7 Global Scope of Almond Shipments: Top 10 markets in Receiving USDA Inspection Fumigation Storage Sizing Storage Complex product flows between handlers, treatment facilities, and customers. An engineering style approach would model these linkages and look at timing and costs. See also, NAS milk contamination study. Electronic Sort Manufacturing Non- Pasteurized: Pasteurized: Dry Roast, Sliced, Blanching Diced, Slivered Oil Roast Custom PPO Treatment Custom PPO Treatment Ship to a Direct Verifiable (DV) manufacturer Ship or Store Hand Sort Custom Steam Pasteurization Ship to a Direct Verifiable (DV) manufacturer Raw Pasteurized 9 3

4 Product Recalls and Alerts (from a UK company website, Aug. 11, 2004) Previously all almonds supplied by Paramount Farms were recalled, as they had been associated with an outbreak of Salmonella enteritidis infection. This week further establishments are recalling products containing almonds supplied by Paramount Farms and these are listed below. Previous recalls relating to the Paramount Farm recall are listed on the US Food and Drug Administration (FDA) web site. Superior Nut & Candy Dist Co, five varieties of 'Raw Whole Almonds', 'Tropical Mix', 'Energy Mix' and California Fruit Mix' Red Flower Ltd, 'Natural Almond' Awrey Bakeries Inc, three varieties of 'Cake' Pacific Food Importers Inc, 'Raw Whole Almonds' Harvest Health Ink, 'Almonds, Whole Raw' and 'Harvest Mix' Bears Foods Market, four varieties of 'Trail Mix' R Hirt Jr Co, 'Raw Whole Almonds' Michigan Dessert Corporation, Sin Fill brand 'Green Pistachio Pudding' Reser's Fine Foods Ink, Stone Mill Foods brand 'SM Pistachio Crème Dessert Salad' Pacific Seasonings Inc, Gold Shield brand 'Raw Whole Almonds' AL Verna Co Inc, Fresh V brand 'Almond Bits' and 'Whole Almonds' Virginia Spanish Peanut Co, 'Repackaged Raw Whole Almonds' and 'Repackaged Raw Diced Almonds' John B Sanfilippo & Son Inc, 'California Mix' Koeze Company, Koeze's Nut House and Loeze's Nuts brands 'Raw Almonds' Kastoria Inc, Oasis brand 'Almond Garlic Spread' 10 Crisis management. Business Issues Communications Litigation Normal Accidents Complexity Motivations for pro-active behavior. 11 Policy Issues: Private sector with quasi-regulatory powers under marketing order. Marketing order: A legally binding instrument that specifies how a particular farm product shall be marketed; the purpose of a marketing order is to foster orderly marketing of the commodity over time, form, and space. (Kohls and Uhl, 1990). Nuts, some fruits have these arrangements in place. 12 4

5 Cost-Benefit Model of Pistachio Marketing Order Dr. Daniel Sumner, University of California-Davis, presented a cost-benefit analysis based on a simulation model. Expected benefits.are an increase in consumer confidence in pistachios as a result of aflatoxin regulation, and the combined increases in consumer demand for pistachios due to mandatory USDA regulation and stringent quality standards. Cost estimate: one half cent per pound 13 Risk Analysis Framework for Government Action Cost-benefit analysis: Benefits of preventing possible illness and death. Probabilistic risk assessments about illness. Costs are known for certain. Slow, deliberative process Science-based. Public comment. Revisions and final report. 14 Food Industry Incentives for Investing in Loss Prevention Industry is heavily invested in healthful image of certain foods, particularly brands. Do investments in reputation enhance incentives for prevention? Or, does a reputation create moral hazard, like insurance? 15 5

6 Market Price Analysis 16 Demand, Supply, and Product Pricing Figure E-3. Market impact of consumer demand growth. Some of the effects of the Figure E-4. Market impact of consumer demand growth and supply response at the farm treatment can be compensated by continuing increase in consumer demand. level. Some of the effects of the treatment can be compensated by continuing increase in consumer demand. Supply increases at the grower level have a counteracting effect, and S put downward pressure on grower prices. S Pr' Pr P Pr S supply of marketing services Pr' Pr P S supply of marketing services D r Pr Pr - P Dr, demand for processed Pr - P Dr Dr, demand for processed supply of raw S supply of raw almonds P P 0 Q DD derived demand for raw Q Q almonds P P 0 Q DD derived demand for raw Q Q almonds 17 Capital Markets: Have food-safety crises affected the value of the firm? Stock price of publicly traded corporations The approach is based on portfolio models More detail next Monday. Securities market for risk management Hedge an insurance company s exposure to property catastrophe 18 6

7 Investment Models Capital goods such as steam-treatment lines, electronic testing / monitoring equipment, traceability IT, irradiation, or other preventive measures. Investment analysis using Net Present Value. Future benefits in risk-reduction are difficult to measure. 19 Transactions Costs Approach Some values cannot be priced in the market. Institutions and management routines arise to reduce, internalize, or shift transactions costs. Are the transactions costs associated with activities that sustain consumer confidence in foods: Internalized at one segment of the supply chain? Shared by participants across the chain? Or transferred downstream to the consumer? 20 Items in Transactions Cost Estimates Auditors for certification protocols Documentation of processes and shipments Search for best practices Time effort in negotiating contracts over quality. 21 7

8 Process Verification vs. Inspection Philosophy Management can most efficiently identify firm-specific controls and monitor the critical steps. Unsustainable cost of inspection 22 Summary Overlaps in policy, business management, and markets make safety and quality an interesting area for research. Relevance for security risks due to deliberate contamination? Consider this issue carefully in your project work. 23 Thank you! Questions and comments to D Blocker Bldg. 24 8