ERIN GAZICA, a freelance writer from Pottstown, Pa.
Food contamination happens more frequently than any consumer wants to think, but risk managers in the agricultural industry are well aware of the exposure they face. Sweeping recalls send products to the incinerator. Consumer trust in a popular brand diminishes. Sales plummet. Some companies, especially smaller ones without the financial backing or staff to handle such a crisis, go under.
Yet it could get tougher for the food industry as food safety legislation gets closer to being enacted. The House of Representatives has already passed HR 2749, the Food Safety Enhancement Act of 2009 (FSEA), while the Senate is still looking at its own legislation, S510.
Even though the bills include provisions that could improve the mainstream food system, small farms and food producers argue that they would be disproportionately impacted by a one-size-fits-all regulatory scheme.
The FSEA would amend the Federal Food, Drug and Cosmetic Act to give the FDA more enforcement powers. Under current law, the FDA can detain food if there is "credible evidence" indicating that the product presents a threat of "serious adverse health consequences or death." Under the FSEA, the government could detain food if there is simply "reason to believe" that the food is "adulterated, misbranded or otherwise in violation of this act."
While consumer groups argue the FDA must be granted mandatory recall authority, farmers and producers say the "reasonable belief" standard would provide too much latitude to the agency and leave it open to abuse of power.
"It will mean stricter food safety laws for processors, but it will also impact grocery stores and restaurants because their vendors will be impacted," said Rick Shanks, national managing director of Aon's food system, agribusiness and beverage practice.
When it comes to regulatory changes, Clark Lindley, president and CEO of Bow, N.H.-based managing general agent, Agriculture Insurance Management Services, argues that agribusinesses should be OK if their own risk management houses are in order.
"You can question what the government is doing to safeguard the food supply," he said. "Sometimes inspections go through without the food really being inspected. That's when you go back to good management. Are they not waiting for the government to tell them what to do, are they being proactive and not reactive, are they doing things they aren't required to do but they want to do because it's for the good of their end product?"
That makes one wonder then, has the spate of recent recalls and contamination events been caused by risk management that's lacking?
"I don't think there are more incidences today than there were 10 years ago, but they are reported more quickly," said Shanks. "Food safety is actually probably better, and the ability to test for what caused the problem and track it back to the source is a lot better today. But today with the Internet and blogs and Twitter and YouTube, there may be no more cases of food contamination but that information gets disseminated all that more quickly."
Just thinking about Peanut Corp. of America's 2009 recall of more than 2,100 processed and packaged foods related to a salmonella outbreak could cause a risk manager to break out in hives. Many well-run companies with commitments to food safety paid for PCA's mistake. PCA, for its part, is no longer in business.
"Look at Kellogg's," said Shanks. "Their recall expense for PCA products cost them $70 million. That's the kind of thing we look at for being the top risk. It's difficult to prevent some of these from happening, and when they happen, they are pretty bad."
The Centers for Disease Control and Prevention estimates that every year about 76 million people get sick from food-borne illness, with more than 300,000 people hospitalized and 5,000 dead.
Shanks said that years ago crisis management was a fairly low-level duty. Today, it requires a whole team of people, going far beyond the risk manager to the very top of the company.
"Consumers expect to see the CEO go out there on TV and tell their story at some point in time," he said. "In my opinion it involves total honesty and transparency. You've got to tell the public what happened, what you're doing to clean up the problem and prevent it from ever happening again."
In some cases that approach pays off. Canadian company Maple Leaf Foods Inc. took a hit in 2008 after a listeria outbreak in deli meats killed 22 people. CEO Michael McCain made a public apology and implemented many changes to the production and testing of the meats. The company agreed to pay $27 million to settle class action lawsuits. To this day the company maintains a food safety blog on its Web site featuring videos, podcasts and commentary from McCain and Maple Leaf's chief food safety officer to update the public on its progress since the recall of all 220 meats packaged at its Toronto plant.
"I admire Maple Leaf Foods a lot," said Shanks. "The CEO did a heck of a job. It was a pure accident that happened, and it was handled very well."
Others aren't so lucky. Food contamination and subsequent recalls quickly sent Topps Meat Co. out of business in 2007 and caused Westland/Hallmark Meat Co. to fold in 2008 after an animal abuse scandal and the country's largest beef recall in history, 143 million pounds.
Some experts argue that well managed companies can survive almost anything, from product recalls to tough economic times.
"I think at the end of the day, the well-run operations with good management, they'll be fine," said Lindley. "When you have a strong organization that keeps a close eye on its contract farmers from the beginning of the growing process through the end of production, they'll be OK."
CROP INSURANCE UPDATE
The USDA's Risk Management Agency, which administers the federal crop insurance program, is expected to have its 17 approved insurance providers signed to a new Standard Reinsurance Agreement by the end of June. The RMA was directed in the 2008 Farm Bill to renegotiate the agreement effective for the 2011 crop year because the program's success has come at an unsustainable price for taxpayers.
Due to significant increases in commodity prices in recent years, government payments to insurance providers more than doubled from $1.8 billion in 2006 to $3.8 billion in 2009--at a time when the number of policies actually decreased. The companies still managed to run a deficit because of runaway agent commissions. In the new agreement, RMA has been directed to cap base agent commissions to minimize the potential for a company to go bankrupt.
According to a government study, in 2009, average agent commission rates in the Corn Belt were 18.6 percent of premium and the government subsidy paid to the insurance companies was 17.1 percent, meaning the companies paid 108.8 percent of their subsidy to agents in this area of the country. The new agreement caps insurance company agent commissions to 80 percent of the government subsidy per policy. It also restructures the subsidy to neutralize the impact of high commodity prices, awarding insurance companies about $1,000 per policy, which the RMA said is a significant increase above the $835 average per policy paid out in 2006 and sufficient enough to support the $400 in expenses the insurance companies say they have per policy.
William J. Murphy, RMA administrator, said that in the process of drafting the new agreement he's met with each insurance company individually, insurance trade groups, commodity groups and even insurance agents, though they aren't a party to the contract.
"The insurance companies are not satisfied with the dollars, but they like the direction we've moved from the first draft," Murphy said. "Of course, the agents don't like the soft cap on commissions, but when I talk to them one on one, they understand my concerns. It gets down to what should this program be costing taxpayers."
The administrator said that, at the end of the day, the RMA needs to have a public-private partnership that the insurance companies stay involved in and that remains reasonably profitable for agents.
The government is still involved in lawsuits stemming from the program's largest insurance company, American Growers, which went bankrupt in 2002, and Murphy said the new agreement must make sure that doesn't happen again.
April 1, 2010
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