Pathogen Reduction DialoguePanel 4

May 7, 2002

The Costs and Benefits of AdoptingFood Safety Interventions.

Michael Ollinger

Market versus Government Allocation of Product Quality

• Firms will invest in food safety quality only if it is profitable to do so. This requires a clear signal to buyers linking the firm to product quality.

• If firms are not able to clearly signal their own quality, then government intervention is warranted.

The Decision-Making Criteria for Food Safety Interventions

•Toolkit–Firms Use Net Present Value Calculations–Government Uses Cost Benefit Analysis gatekeeper

•Purpose–gatekeeper function (Antle, 1995)–choose among proposals (MacDonald, 1996)

Net Present Values Calculations of Firms versus Government Cost Benefit Analyses

Net Present Value:

I < non-food safety profit +market value of food safety

Cost Benefit Analysis:

I+G< non-food safety profit +market value of food safety

+value of public health benefits

Market Mechanisms Accruing Health Benefits

Private Investment with Health Benefits as Unintended Consequence (Profit>0)

Example: investments in automated handling systems.

Market Mechanisms Accruing Health Benefits

Private Investment Yields an Obvious Change in Food Safety Quality (Profits>0)

Example: irradiation.

Market Mechanisms Accruing Health Benefits

Contractual Arrangements Yielding Health Benefits (Profit>0)

• Single source suppliers of raw or nonbranded products

• Branded Products

• Buyer Contracts Explicitly Requiring Additional Quality Control

Example of Food Safety Quality Contract

No Contract:

Profits=($1.00-$0.80)/pound*10 million pounds

=$2.00 million

Contract with $0.03 per pound in quality costs:

Profits= ($1.00-$0.80-$0.03)/pound *12 million pounds =$2.16 million

Instances When Private Markets Fail

•More than one supplier of generic meat products

•Source of foodborne illness not identified

•Consumer illness not recognized as foodborne illness

FSIS Incentives Driving Private Investments That Yield Health Benefits

A. Shift Responsibility for Quality to Industry

1. Increase Industry Food Safety Investment,

Voluntary Total Quality Control Programs, 5% adoption;

Mandatory HACCP, 100% adoption.

2. Reduce FSIS non-health related responsibilities

New Linespeed Inspection System, 33% adoption

FSIS Incentives Driving Private Investments That Yield Health Benefits

Example:Not all plants use New Linespeed Inspection System

Initial Conditions: FSIS limits linespeed to 70 bird/minute, but 10 workers at plants A and B can produce 120 and 70 birds/minute

Change: linespeed of 90 birds/minute allowed with 2 new workers

Result: Only plant A benefits so only it changes.

Conclusion: plant technology determines adoption.

FSIS Incentives Driving Private Investments That Yield Health Benefits

B. Greater Regulatory Stringency to raise the cost of weak food safety quality control

Examples: Larger sample sizes used for zero tolerance organisms:

1. E coli 0157:H7: favors poultry/pork over beef slaughter

2.Listeria monocytogenes: favors slaughter over processors

FSIS Incentives Driving Private Investments That Yield Health Benefits

C. New Regulations Raise Food Safety Costs.

1 Performance standard: tolerance for target organism

Example: four plants affected by regulation.

Two meet the standard; do nothing. Plants A and B must change.

Plants A and B slaughter 500,000 and 5,000 head per year

FSIS Incentives Driving Private Investments That Yield Health Benefits

Performance Standard Example (continued)

Option 1: steam pasteurization ($1 million with 5 year life)

Cost of pasteurizer: $0.40 per head at “A”; $4.00 per head at “B”

Option 2: better dehiding training ($10,000 per 5,000 animals); worker turnover of once a year at “A”; once every 5 years at “B.”

Cost of dehiding: $2.00 per head at “A”; $0.40 per head at “B”.

Result: “A” pasteurizes and “B” changes dehiding operations.

Conclusion: plants choose least cost method; least distortion.

FSIS Incentives Driving Private Investments That Yield Health Benefits

C. New Regulations Raise Food Safety Costs.

Process standard: mandated practices or technology.

Example 1: Per Unit of Time Process Standard.

Requirement: Plants expected to clean hand tools once per hour.

Plant Size: Plants A and B process 100 and 5 animals per hour.

Productivities at plants A and B: 100 and 5 animals/cleaning.

FSIS Incentives Driving Private Investments That Yield Health Benefits

Example 2: Per Unit Volume Process Standard

Requirement: Plants must clean hand tools once every 5 animals

Productivity: 5 animals per cleaning for plants A and B

Conclusion: Volume standards have less distortion than time standards.

Selected process may not be effective against target organisms.

Process standards less efficient than performance standard.

Summary: Markets fail because food safety quality cannot be easily measured

Some Market Mechanisms to Overcome Lack of Information

1. Irradiation

2. Contracting directly for improved food safety quality.

3. Creating brand name products.

4. Inadvertent contracts leading to food safety.

Summary: Incentives Offered by FSIS

1. Shift responsibility for quality to industry

2. Raise food safety costs by increasing regulatory stringency.

3. Increase food safety investment with new regulations.

-performance standards less costly relative to process ones.

-process standards on a per unit basis are least distorting.

Summary: Assessment

•Markets need information to function properly

•FSIS has mainly raised regulatory costs but has provided little information to buyers.

•FSIS has information on HACCP performance, Salmonella standards, and generic E coli requirements.

•Option 1: permit labels stating performance of quality control.

•Option 2: publish performance rating directly or use a proxy