Private Market Mechanisms: Meat and Poultry

Firms invest financial and human resources to prevent microbial pathogens, carcinogenic chemicals, and other harmful substances from entering their food products. The level of food safety provided depends upon:

• customers' demand for food safety
• fear of losing a reputation as a safe food provider
• contractual requirements with customers and suppliers
• fear of lawsuits arising from the sale of contaminated products
• State, local, and federal government regulatory requirements
• firms' capacity to provide the food safety practices and technologies necessary to meet those demands.

For some firms, this means investing just enough to satisfy regulatory requirements, but many others choose an investment level that exceeds the regulated standard.

Food safety technology can increase a company's capacity to prevent a foodborne contamination. A food safety audit--a quality control tool in which an auditor observes whether a plant's processing practices and technologies are compatible with good food safety practices--can indicate how effectively food safety technology is being used. Fast food restaurants, grocery stores, and other major customers of meat and poultry processing plants conduct their own audits or hire auditors to assess the soundness of a plant's processing operation. Meat and poultry plants can also audit themselves as a way to help maintain process control. In Food Safety Audits, Plant Characteristics, and Food Safety Technology Use in Meat and Poultry Plants, ERS researchers documented the extent of food safety audits in meat and poultry processing plants. ERS also examined the associations between the use of audits and plant size, firm structure, and food safety technology use. Results show that larger plants, plants subject to food safety audits, and plants that are part of a multiplant firm use more food safety technology than other plants. Plants subject to both plant-hired and customer-hired audits had greater technology use than single (plant- or customer-hired) audit plants.

Costs. Costs play a major role in what level of food safety a company chooses. In Meat and Poultry Plants' Food Safety Investments: Survey Findings, ERS researchers showed that, relative to small plants, large cattle-slaughter plants made more extensive use of food safety equipment, testing, and dehiding practices and had nearly the same levels of sophistication as small plants in sanitation and operating practices. These choices occur because steam pasteurization systems and other food-safety-control equipment may cost more than $1 million, making them impractical for all but the largest plants. Manual operations required for cleaning, on the other hand, have similar costs per head of cattle across plants, making them viable for all plants. The cost advantage for large plants in funding food-safety equipment does not mean that they provide meat and poultry with higher food safety quality. Production lines at small plants are much slower, giving workers more opportunity to avoid processing mistakes that lead to product contamination. Careful hide removal had the highest payoff in a case study (see Malcolm, Scott A., Claire A. Narrod, Tanya Roberts, and Michael Ollinger. "Evaluating the Economic Effectiveness of Pathogen Reduction Technologies in Cattle Slaughter Plants," Agribusiness 20(1):109-123, 2004).

High-profile cases of foodborne illness have caused big drops in sales of agricultural products, causing some firms to go out of business. This threat of lost sales has led to market-driven efforts to provide safe food. Major buyers of food products, such as large fast-food chains and retail buyers, impose stringent food safety process control standards on their customers.

Independent of those major buyers, firms have made organizational changes such as vertical integration and have turned to new food-safety-control technologies as ways to control pathogens and maintain their reputations for food safety quality (see "New Pathogen Tests Trigger Food Safety Innovations"). International markets have also influenced producer behavior (see Product Liability and Microbial Foodborne Illness and The Economics of Food Safety: The Case of Green Onions and Hepatitis A Outbreaks).  

Government Regulation. The Government has also intervened to ensure food safety. USDA's Food Safety and Inspection Service (FSIS) promulgated the pathogen reduction hazard analysis critical control point (PR/HACCP) rule in 1996. An overview of the costs of this regulation is provided in Meat and Poultry Plants' Food Safety Investments: Survey Findings. For a discussion of U.S. food safety regulation and a preliminary assessment of the costs of regulation, see Managing for Safer Food: The Economics of Sanitational Process Controls in Meat and Poultry Plants.

Companies place a high value on maintaining their reputations for producing safe products. The strength of the incentive depends on the level of food safety demanded by customers and the ability of those customers to link products purchased to vendors. Eating pattern data can be used to link the food to a vendor. The vendor, in turn, can link the food to a supplier. However, linkages are seldom made from an outbreak investigation because it can take 3-5 days to develop symptoms and other foods would have been eaten over that time. This incomplete information diminishes the incentive to maintain food safety.

Legal Cases. In Product Liability and Microbial Foodborne Illness, ERS researchers point out that many legal cases involving foodborne illness injuries never go forward and, of those that do, only one-third of all plaintiffs received jury awards. Aside from litigation costs, a reputation for unsatisfactory food safety quality can cause a company to go out of business and an industry to lose sales. Hudson Meats, for example, was forced out of the industry after being implicated for selling contaminated meat products. Mexican green-onion exporters suffered a decline in sales after U.S. food authorities traced a hepatitis outbreak to their products, and U.S spinach producers experienced a complete loss of sales when FDA advised consumers to stop eating fresh and bagged spinach in the wake of an outbreak in fall 2006 due to E. coli contamination.

Major customers of food products such as fast-food restaurants, retail buyers, and international buyers have substantial control over food-safety processes. These buyers impose stricter standards than those demanded by regulatory bodies. The result is more extensive use of food safety equipment and intensive sanitation and operating practices (Meat and Poultry Plants' Food Safety Investments: Survey Findings).

In the Food Safety Technologies and HACCP Compliance Survey, ERS identified the level of use of numerous food safety technologies used to control pathogens. More recent surveys conducted by the Food Safety Inspection Service are available at Survey of Meat and Poultry Processing-Only Plants and Survey of Meat and Poultry Slaughter and Processing Plants .

Regulation Establishes a Minimum Level of Meat and Poultry Food Safety Quality

USDA's Food Safety Inspection Service (FSIS) has regulated meat and poultry processing for more than a century. As described in Managing for Safer Food: The Economics of Sanitation and Process Controls in Meat and Poultry Plants, the centerpiece of U.S. meat and poultry food safety regulation is the 1996 pathogen reduction/hazard analysis critical control point rule. This regulation:

• requires all meat and poultry establishments to develop and implement written sanitation standard operating procedures (SSOPs).
• mandates generic E. coli testing by slaughter plants.
• establishes pathogen reduction performance standards for Salmonella that slaughter establishments and raw ground meat producers must meet.
• requires all meat and poultry establishments to develop and implement a HACCP program.

The goals of this regulation were to shift more responsibility for food safety to private markets by requiring producers to implement and maintain their own HACCP program, introduce a performance-based standard to which plants must adhere, and compel producers of raw products to test products to verify the integrity of their food safety process control systems. Food safety performance standards for meat and poultry are based on allowable levels of pathogens. Regulators monitor performance but do not specify how producers meet those tolerances. Performance is based strictly on whether the producer meets the standard.

The current level of food safety found in U.S. meat and poultry food products is a result of process and performance regulations and management-determined actions brought about by market incentives. Processing regulations include sanitation and other tasks related to food safety; management-determined actions include capital investment and other actions independent of process regulations, but possibly driven by performance standards. In The Interplay of Regulation and Marketing Incentives in Providing Food Safety, ERS researchers examined the impact of process regulations mandated under the Pathogen Reduction/Hazard Analysis and Critical Control Point (PR/HACCP) rule on food safety process control. ERS used the share of samples testing positive for Salmonella spp. as a measure of food safety process control in meat and poultry processing plants and found empirically that management-determined actions account for about two-thirds of the reduction in samples testing positive for Salmonella spp., while process regulations account for about a third of the reduction. The importance of process regulation varies, but accounted for 50 percent or more of process control in about a quarter of plants, and in some plants accounts for the entire process control system.

In Economic Assessment of Food Safety Regulations: The New Approach to Meat and Poultry Inspection, a pre-regulation benefit/cost analysis of four pathogens estimated that public-health protection benefits (if illnesses were reduced by 17 percent or more) exceed industry compliance costs. Both the benefits and costs may have been understated. The health costs excluded some of the costs of lifetime complications due to foodborne illness. Recent estimates suggest that the industry cost of compliance is much higher. The original estimated cost was $1 billion to $1.2 billion over 20 years while recent estimates suggest yearly costs of $380 million and a fixed cost of $570 million. Additionally, the research shows that compliance costs were three to eight times greater for small slaughter plants (lowest quintile by size) relative the larger plants (highest quintile by size). 

The PR/HACCP rule is not the only meat and poultry food safety regulation. FSIS regulations enforce zero limits for two deadly pathogens--Listeria monocytogenes in ready-to-eat meat and poultry and E. coli O157:H7 in ground beef. FSIS, along with various State and Federal officials, monitors meat and poultry for these and other harmful pathogens. If one of the agencies determines that meat or poultry is contaminated, a firm might be asked to recall its products. This is not mandatory but a firm that does not recall its products may have to face an onslaught of bad publicity. No firm has refused to conduct a recall after being asked to do so. ERS is now conducting research on the effect of food recalls on plant performance to assess the effectiveness of recalls in encouraging better food-safety process control.

Innovation Enhances Meat and Poultry Food Safety

Producers may be motivated to adopt food-safety innovations if offered incentives such as higher prices and less stringent regulatory oversight and disincentives such as lost sales contracts and regulatory fines. Innovations can occur at any link in the supply chain, although the greatest economic incentives are generally on the consumer end, because at that stage it is easier to trace contaminated products back to the supplier.

Recent food-safety innovations. Major changes in pathogen testing technologies have lowered food safety information costs, giving industry and regulators a clearer understanding of the level of food safety and encouraging greater food-safety-control effort (see "New Pathogen Tests Trigger Food Safety Innovations"). Other important innovations include equipment that steam-pasteurizes beef carcasses and supply-chain management and pathogen testing systems to control foodborne pathogens in hamburger patties (see "Food Safety Innovation in the United States: Evidence from the Meat Industry").

Innovations can be as simple as work practices that minimize opportunities for product contamination. Processing plants can greatly improve pathogen control through strict sanitation and process control. For example, running conveyor belts during sanitation procedures and sanitizing hand tools after each cut of meat or poultry greatly reduce cross-contamination.

Assigning production workers responsibility for food-safety decisions has likewise improved food safety. The report, Meat and Poultry Plants' Food Safety Investments: Survey Findings analyzed 2001 survey results for meat and poultry plants on innovative plant technologies and their costs. Innovation is costly, but it enhances food safety and reduces the likelihood that a plant will suffer a catastrophic food safety failure, resulting in loss of its reputation for food safety and incurring large costs that could lead to bankruptcy.

Domestic and international regulators increasingly use risk-assessment models to assist in setting priorities and standards for foodborne pathogens. The models range from identifying and ranking consumption of high-risk foods to detailed farm-to-table models of how risk may change at various stages of the supply chain for a particular pathogen-food combination. A U.S. model of practices in beef slaughterhouses found that improvements in hide removal make the most important contributions to reducing the risk of generic E. coli contamination. Economic analysis of this model found that careful hide removal in cattle slaughter plants is more cost-beneficial than irradiation, costing 5-10 cents per carcass for large slaughter plants. (See Malcolm, Scott A., Clare A. Narrod, Tanya Roberts, and Michael Ollinger. 2004. "Evaluating the Economic Effectiveness of Pathogen Reduction Technologies in Cattle Slaughter Plants," Agribusiness, vol. 20 (1), pp. 109-123.)

Food-safety and trade benefits are the twin goals of a constantly evolving international network of multilateral coordination (such as harmonization), private system approaches (HACCP systems), and trade negotiations (such as the World Trade organization's Uruguay Round, 1986-1994, which resulted in the agreement on sanitary and phytosanitary measures).

Some food-safety policies can be significant barriers to international trade and are often seen by other countries as shielding domestic producers from competition. Such perceptions cause friction among regulators and trading partners. In a recent survey on technical barriers to trade, USDA's foreign representatives asserted that food-safety barriers accounted for a fourth of existing barriers and for half of the estimated export revenue losses because these barriers often restrict sales of high-valued products, such as processed foods and meats.

Last updated: Saturday, May 26, 2012

For more information contact: Michael Ollinger