Weighing Incentives for Food Safety in Meat and Poultry

Two massive recalls of ground beef and turkey luncheon meats linked to foodborne illnesses in the Midwest and Northeast in the fall of 2002 put food safety concerns back in the headlines. These unusually large recalls are part of an increasing number of meat and poultry recalls over the past several years (see 'Recalls on the Rise').

Despite these troubling signs about the safety of meat and poultry products, industry and government regulators have been taking steps to improve food safety and, in fact, the increase in recalls signals more diligence and better detection technology. Market mechanisms, such as product branding and stricter food safety requirements imposed on suppliers by large buyers, are bolstering the levels of food safety in some cases above those required under regulation.

Branding Encourages Food Safety…

Consumers surely want safe food every bit as much as they want food that looks appealing, tastes good, and is convenient to prepare. However, unlike fat content, consumers cannot accurately measure food safety. For example, many consumers who experience food-related illnesses believe their illness is due to a virus or to some other nonfood source. Even if consumers connect an illness with a particular food—such as hamburger—they may not know which company's hamburger to avoid because many meat products bear only store labels. Although consumers could stop purchasing meat or poultry (or all their groceries) from a particular store, consumers know that this action does not likely punish the producer.

Stores often have many suppliers of meat and poultry products, so they cannot simply withdraw business from low-quality producers because they cannot always identify them. Or, the store may be a small customer of a large producer, making it difficult to elicit change.

Food suppliers recognize that some consumers will pay premiums for branded products because they are perceived to be of better quality. Oscar Mayer in luncheon meats, Tyson Foods in poultry, and Smithfield Farms in pork are companies that have developed branded products connoting better quality.

The downside for these companies is that the brand may also be used to more readily identify the company as the source of a foodborne illness. Producers of branded products invest a lot of money into promoting product quality and will see that investment evaporate if a serious food safety breach occurs. Bil Mar foods, producer of Ball Park hotdogs, for example, spent more than $100 million during 1998-2000 to improve food safety and convince consumers of its products' safety after USDA's Food Safety and Inspection Service (FSIS) determined that it was producing products contaminated by the pathogen Listeria monocytogenes. Researchers at the University of Arkansas found that food recall announcements by publicly traded companies cause stock prices of affected firms to decline.

As a consequence, producers of branded products must invest more in food safety than producers of unbranded products, suggesting that recent trends toward higher sales of branded fresh meat cuts, such as pork roasts, should enhance food safety. Unfortunately, lower cost ground meats have the highest likelihood of pathogen contamination and, except for irradiated meats, these are less likely to be branded.

…As Do Customer Requirements

Food processors are not alone in the quest for safer food. Large restaurant chains spend millions of dollars promoting an image of tastiness, convenience, restaurant cleanliness, and product safety. Losing this image can be very costly. Jack In The Box, McDonald's, other major restaurant chains, and an increasing number of grocery stores and wholesalers routinely set strict food safety controls for their suppliers, and cease contractual arrangements with those that do not comply. Burger King, for example, terminated a contract with Hudson Meats, forcing that company to exit the industry, after it underwent a huge recall of its meat products due to E. coli O157:H7 contamination.

Export markets are another lucrative market for meat and poultry companies. Like other major customers, many importing countries impose strict standards and pathogen testing on sellers. For example, South Korea rejected U.S. hot dogs in 1999 because they were contaminated with Listeria monocytogenes, and Russia voiced persistent concerns over the food safety of U.S. poultry throughout 2002.

ERS researchers recently completed a survey of almost 1,000 meat and poultry slaughter and processing plants. The survey covered numerous aspects of food safety controls and their costs. Among other findings, it provides new evidence that contractual arrangements covering food safety standards between meat and poultry plants and their buyers result in higher levels of food safety in five categories: equipment, testing, dehiding, sanitation, and operating procedures.

Legal Liability Provides Limited Incentives

The legal liability system forces producers to make food safety investments up to the point at which the probability that the plant's products would be identified as the cause of an illness would be a very low. However, the incentives of the legal system limit food safety investment. Litigation is costly and most foodborne illnesses result in relatively minor gastrointestinal distress, such as diarrhea, that is either not recognized as food-related or not thought to be serious enough to pursue in court. Also, ERS research has shown that plaintiffs are unlikely to receive awards in foodborne illness trials, even in the case of a major illness, because rarely can the plaintiff make a certain link between a particular food and the sickness.

This is not to say that court actions are completely ineffective, however. Besides the costs associated with a rare loss in court, a highly publicized trial can severely harm a firm's image. To reduce this threat, companies often make out-of-court settlements.

Evolving Regulations Buttress Economic Incentives

Food safety regulation in the United States dates to 1890 when trichinae, tiny worms in hogs, emerged as a public and animal health problem (see 'Milestones in Food Safety Regulation'). The Jungle, Upton Sinclair's 1906 exposé of the brutal working conditions and unsanitary practices in Chicago meatpacking plants, led to the passage of the Federal Meat Inspection Act of 1906. Legislation in 1967 and 1968 addressed the use of inexpensive nonmeat fillers in meat products and extended FSIS's regulatory jurisdiction over a wider array of meat and poultry plants. Regulations based on the legislation also established cooking times, temperature minimums, and other processing standards.

Regulatory changes occurring after the 1968 legislation greatly increased FSIS inspection requirements and forced FSIS to shift inspection priorities. One key change was implementation of voluntary process control programs that reduced some FSIS tasks. However, industry did not widely adopt the programs, most likely because companies calculated the added costs of the programs to be greater than the expected market benefits.

By 1980, some of the earlier problems addressed by regulation had receded from public view because regulatory, technological, and industrial changes resolved them. Public attention turned to Salmonella and other human pathogens, such as E. coli O157:H7, that lived in an animal's gastrointestinal tract without causing noticeable disease in the animal.

Food safety regulation entered a new era in 1989 when Listeria monocytogenes was declared an adulterant with a zero tolerance. Later, FSIS used the voluntary process control program framework as a model for a system of preventive controls known as Hazard Analysis and Critical Control Point (HACCP) program. Under a HACCP program, plants monitor points in their processing system that engender potential food safety hazards and take corrective actions when they suspect that a critical level of one of these points has been breached.

The 1996 Pathogen Reduction/HACCP rule mandated that meat and poultry plants develop and implement a system of standard operating procedures for sanitation and a HACCP program. Additionally, plants producing raw ground products or slaughtering animals have to adhere to Salmonella performance standards. Finally, slaughter plants have to also conduct E. coli testing to verify the adequacy of their process controls. PR/HACCP sanitation and process control requirements followed regulations mandated after the enactment of the 1967 and 1968 legislation. These regulations required plants to perform commonly accepted food safety practices, such as preventing contact between raw and cooked products and enforcing employee handwashing.

Plants Perform Required Tasks

A team of FSIS process control inspectors enforces regulations by determining whether sanitation and process control systems are working to prevent adulteration. Inspectors examine recorded information and conduct scheduled and unscheduled spot checks of various plant procedures. If an inspector together with a FSIS compliance officer determine that a plant is not properly performing tasks critical for safe food, they can decide that the task is out of compliance. In 1999, noncompliant HACCP tasks ranged from a high of about 5.5 percent in poultry slaughter plants to less than 2 percent for frozen meal/other food processors and for retailers and wholesalers.

These low noncompliance levels may lead one to believe that FSIS secures compliance through the exercise of strong enforcement powers. However, FSIS has used its enforcement powers infrequently. If a plant has a chronic problem with sanitation or HACCP tasks, an inspector can impose a maximum penalty of temporarily shutting down the contaminated equipment or responsible department. Records for 1999-2001 indicate that FSIS issued an average of one of these types of penalties per 75 plants. Although a stronger action—plant closure by removal of inspection services—is possible, protracted court proceedings in the past have led FSIS to rarely use this enforcement tool. The high performance of sanitation and HACCP tasks in relation to the level of enforcement powers suggests that plants and their customers believe that these tasks are important to business performance.

Meat and poultry plants had less than 6% of HACCP tasks in noncompliance in 1999

Industry	Noncompliant tasks (percent)
Red meat slaughter	2.6
Meat processing	1.4
Poultry slaughter and processing	5.5
Frozen meals and other packaged products containing some meat	1.5
Retailers and wholesalers	1.2
Source: USDA, Food Safety and Inspection Service files and Enhanced Facilities Database.

Food Safety Costly for Plants, But Barely Noticed by Consumers

Understanding food safety costs helps regulators to evaluate how the industry may receive new regulations or amendments to existing regulations, and to assess the pros and cons for industry and consumers of regulatory changes.

In 2002, ERS extensively studied the costs of food safety regulation by estimating the cost of sanitation and process controls and of the PR/HACCP rule. ERS estimates that, before the PR/HACCP program began, required sanitation and process control tasks increased total production costs by a little more than 1 percent, or about $850 million, per year for the meat and poultry industry. This compares to a gross margin of about 5 percent between value of shipments (or output) and animal, labor, and capital costs in red meat packing plants. For small plants, this margin is much smaller and may approach the cost of sanitation and process control. To the average supermarket shopper, the added cost is so small as to have an almost unobservable impact on retail prices.

Added cost to consumers from food safety measures is small

Product	Increase in retail price (percent)
Ground beef	0.8
Sirloin steak	0.3
Chuck roast	0.6
Center cut pork chops	0.4
Ham*	1.8
Pork sausage*	1.3
Chicken breast	0.3
Whole turkey	0.6
*Includes costs from slaughter and processing operations.

Interestingly, costs did not vary with plant size. Large plants had no special economic advantage in food safety process control. Costs were clearly lower for plants with poor sanitation and process control performance and higher for those with better performance.

ERS then estimated that PR/HACCP required another 1 percent of total costs on top of those incurred earlier for sanitation and process control tasks, which were still required. Plants that had advanced quality control programs before PR/HACCP paid significantly less to implement the new requirements than plants with minimal controls. The combined costs translate into about 4 percent of the costs that plants can control-additional costs that are, once again, insignificant for retail prices but significant from the point of view of the plant's balance sheet.

The $850 million in costs to plants due to PR/HACCP is likely passed on to consumers in the form of about a 1-percent increase in retail prices. As a point of contrast, consumers can now purchase irradiated meat products that supply near-perfect food safety. But irradiated products are not acceptable to all consumers and are considerably more expensive than their untreated counterparts. Lancaster Farming reported that irradiated ground beef in October 2002 was priced 10-30 cents, or 5-10 percent, higher per pound than nonirradiated ground beef at Wegmans Food Markets in Pennsylvania. Other stores likely have similar price premiums.

Poor Food Safety Performance Doesn't Pay in the Long Run

If food safety controls cost plants money, it might seem that plants could do better economically with more lax sanitation and process controls. To the contrary, our studies indicate that, especially for certain types of plants, poor food safety performance does not pay over the long haul. ERS researchers found that sausage makers and other companies that further process raw bulk meat and poultry, along with larger-than-average slaughter plants, with poor quality control records had 3-8 percent higher rates of exit from the industry than plants with better records. Only small slaughter plants appear to have benefited from skimping on food safety efforts.

It's easy to explain these results. Firms that make further processed meat and poultry products typically produce branded products that allow buyers to more easily associate product quality with a particular producer. Slaughter plants, on the other hand, generally produce generic ground hamburger, pork chops, and other raw meat products, making producer identification difficult. It is easier, however, for the market to identify and implicate large slaughter plants than small ones. Large plants are more likely to be exclusive suppliers to buyers that require strict food safety standards such as quality-conscious supermarkets, large-volume restaurant chains, and export markets. Large plants are also more likely to be caught producing off-quality products because more consumers eat their products, making the likelihood of sickness greater.

Market mechanisms in the form of more widespread use of brands and contracting for food safety, government oversight embodied in the PR/HACCP rule, and more stringent enforcement indicate that industry and FSIS are putting forth a great deal of effort to ensure the safety of meat and poultry products. A way to enhance food safety still further is to strengthen market forces by making information about a plant's food safety performance as readily available to consumers as the amount of fat and other commonly reported product attributes. Market forces could be further extended through greater product testing, the provision of test results to the public, and improvements in scientific methods that link foodborne illnesses to the producer.

Exit rates were higher for large and medium-size plants with poor process control

Process control performance1	Small2	Medium2	Large2	All sizes2
Slaughter plants (percent exits, 1992-96)
Good	8.3	0	0	8.2
Average	9.6	7.4	2.9	8.5
Poor	4.0	15.0	7.1	7.1
All	8.9	806	4.1	8.3
Processing plants (percent exits, 1992-96)
Good	11.8	0	0	11.4
Average	10.0	8.7	4.8	9.2
Poor	15.0	14.8	7.3	12.8
All	10.7	9.3	5.4	9.9
1A plant with a good level of process control has a process control record that is superior to 90 percent of all the other plants, and a plant with poor process control has a record that is worse than 90 percent of all other plants in the industry. Plants that fall into neither one of these categories have an average rating. 2Small plants have less than one-half the average plant's output, large plants have twice the average plant's output, and medium plants are in between.