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Food Safety Incidents and the Food Supply Chain: The Impacts on Consumers and Producers and the Strategic Response of Supply Chain Managers and Food Industry Leaders

Saghaian, Sayed
University of Kentucky
Start date
End date
1. To investigate the dynamic responses of consumers to the impact of food safety incidents, evidenced and measured by changes in their purchasing decisions in the temporal neighborhood of food safety events. A key question regarding consumer behavior is how consumers react when faced with unexpected food safety scares and whether consumer responses to sudden, unanticipated safety concerns are consistent with rational well-informed consumer behavior. There is a great deal of concern over food safety shocks and their related regulations and standards associated with market exchange of agricultural products aiming at reducing the spread of pests and diseases and mitigating foodborne illnesses. Better understanding of consumer reactions to food safety scares helps the food industries restore consumer confidence after food safety crises and provides opportunities for national-level production differentiation based on food safety and quality.

2. To explore the impacts of food safety events on monopolistically competitive farms and firms in the food industries. There are economic losses associated with food safety incidents in the form of food recalls, loss of consumer confidence in the food supply channels, and loss of markets. Producers and processors need to be prepared for low-probability events that can have large detrimental impacts. Investments that can be made to lower the large losses from an unlikely event seem to be justified. Proactive information provision in the food marketing systems reduces the impacts of the food scare. Producers and retailers can promote branded food products with emphasis on variety and quality to differentiate themselves from competitors and gain competitive advantage over rivals. Marketing food safety and quality as an attribute and using quality assurance labels for food products effectively restore consumer confidence as well as potentially create niche markets to increase both producer and consumer surplus.

3. To investigate the market impact of food safety scares on food sectors by focusing on the short-run and long-run dynamics of price adjustment and price transmission along the marketing channels of food products to see how food safety scares affect the price margins at the farm, wholesale, and retail levels. These issues are often considered to be relevant to structure, conduct, and performance issues (i.e., market power). Market concentration and imperfect competition can be the cause of asymmetric price transmission. Price asymmetry may reflect asymmetries in underlying costs of adjustment, or may reflect government intervention effects. Defining the extent of a market is also used for anti-trust considerations.

4. To investigate the strategic responses of producers, marketing managers, and retailers to food safety incidents. Better understanding of marketing channels and consumer reactions to food safety scares helps the food industries construct strategies that restore consumer confidence after food safety crises, with emphasis on enforcement of public and private regulations, traceability, product differentiation, packaging, labeling, and provision of food safety assurance as a quality attribute.

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Non-Technical Summary:
The effects of food safety scares are part of a dynamic process, where consumers change consumption during the scare and often return to their past behavior afterward. The dynamics of consumers' perception of food safety scares are interesting and important to capture because of their strategic implications for the supply chain management. A safe food supply is arguably one of the most important factors in a society's health and success. Safe food production, transportation, distribution and handling are all paramount to gaining and keeping consumers' trust. A key question regarding consumers and producers is how they react when faced with unexpected food safety shocks. Recently, there have been many food safety outbreaks in the processed beef and other meats such as pork and poultry, as well as seafood products, fresh produce such as lettuce, spinach, cucumber, and others. Prior to this, concern was about Bovine Spongiform Encephalopathy (BSE) discovery and Foot-and-Mouth Disease (FMD) outbreaks that received worldwide attention and reporting. This project will explore producers and consumers' reactions and responses to food safety incidents. Better understanding of market reactions to food safety scares helps protect the loss from such incidents.

The impact of food safety scares has been extensively investigated in the literature. Scientific methods applied to food safety events have a wide range from most commonly used models of Almost Ideal Demand System, the Rotterdam models and their different variations, to models of contingent valuation, experimental auction and conjoint analysis (e.g., Marsh, Schroeder and Mintert, 2004; Piggott and Marsh, 2004; McCluskey, et al., 2004; Peterson and Chen, 2005; Livanis and Moss, 2005; and Chopra and Bessler, 2005). These models, however, are not quite appropriate to investigate the short- and long-run dynamics of farm, wholesale and retail-level changes, and consumer reactions to sudden food safety events in the neighborhood of food safety events as reflected in the actual data, which are the main goals of the first two objectives. In cases where actual data do not exist, contingent valuation and other non-market valuation techniques are widely used. In cases where high frequency retail price and quantity series are available, one can use contemporary time-series analyses, namely, cointegrated vector error correction (VEC) models, directed acyclic graphs, and historical decomposition graphs to investigate consumer responses to sudden, unexpected food safety scares (Saghaian, Maynard, and Reed, 2006). These techniques result in a more accurate estimation of the complex interrelated effects among the variables under study. Directed graphs, in particular, allow the errors among the endogenous variables to be incorporated into the forecasted effects of the market shocks over time. We can trace the dynamic effects of the market shocks on farm, wholesale and retail-level prices and quantities over time to see if these changes are consistent with well-informed rational consumer behavior, evaluate price transmission along the supply channel, investigate speeds of adjustment and market integration, or examine potential differential impacts of the shocks along the marketing channels. The VEC model will not only allow estimates of short-run relationships for the price and quantity series, but it also preserves the long-run relationships among the variables. Cointegration binds the series into a long-run relationship; it is now commonplace to examine time-series variables by cointegration techniques. Historical decomposition aids in providing a visual explanation of the impact of the beef safety shock on the price and quantity series in the neighborhood of each event. Specifically, orthogonal innovations are constructed using graph theory to determine causal patterns behind the correlation in contemporaneous innovations of the VEC model.

2012/04 TO 2012/12
OUTPUTS: The Sanitary and Phytosanitary (SPS) Agreement concerning foot-and-mouth disease (FMD) continues to be a major barrier regarding trade among countries. International pork trade has been affected by FMD outbreaks which lead disease-free exporters to gain market share. Global production and consumption of pork during 1996 to 2007 rose substantially. The demand for pork clearly offers opportunities for disease-free pork producers to expand international sales. The ranking of the top 20 pork exporters and importers have shuffled noticeably because of import bans from FMD-free importers, so that FMD-affected exporters have lost their global markets as a direct cause of FMD. Hence, global pork export patterns have been influenced by FMD events.This study investigated foreign FMD impacts on four major pork exporters, Canada, Germany, Spain, and the U.S. The results confirm that foreign FMD have impacted pork exporters differently. Germany has gained the most exports during foreign FMD outbreaks in pork importing countries; the U.S. is second, Spain is third, and Canada is fourth. European pork exporters have locational and lower transportation cost advantages over North American pork exporters.This research was presented at the 2012 International Food and Agribusiness Management in June in Shanghai, China. This research is also under review by the Canadian Journal of Agricultural Economics. PARTICIPANTS: Not relevant to this project. TARGET AUDIENCES: Not relevant to this project. PROJECT MODIFICATIONS: Not relevant to this project.

IMPACT: Past research findings have shown: first, pork exports decline when an exporting country develops FMD, and exporters with a vaccination policy have larger negative impacts than those with a slaughter policy; second, overall pork imports increase when an importing country institutes a slaughter policy, but importers with a vaccination policy import the same level of pork. However, the competition among pork exporters is different for each exporting country. The FMD events during 1996 to 2007 greatly impacted global pork trade. Among the top 10 pork exporters, only Canada, U.S., Germany, and Spain showed strong growth in exports during that time. These four countries are FMD-free and have not had an outbreak, so they have not had bans imposed through the SPS agreements on FMD. Markets for FMD-affected pork imports have been captured by Germany no matter which policy is adopted by importing countries; the FTA that many countries have with Germany through the European Union is also helpful. The U.S. only seems able to capture increased exports when the importing country adopts a vaccination policy. FMD outbreaks don't seem to affect Spain pork exports, but they negatively impact Canadian pork exports when the importers adopt a slaughter policy. Hence, the empirical results reveal that Germany gains the most among these four countries when there is an FMD outbreak; the U.S. is next; followed by Spain and Canada. When the market competition between North American and European exporters is analyzed, importing countries with either slaughter or vaccination policies increase their pork imports from European countries when they have an FMD outbreak. However, North American pork exporters still hold markets where FMD-affected pork importers adopt a vaccination policy. Moreover, the pork import markets with a slaughter policy are primarily provided by European exporters rather than North American exporters. Hence, the analysis of pork exports between North America and European exporters shows that European countries have a better competition position than North American exporters when importing countries have FMD outbreaks. The different competitive environment between North American and European pork exporters during FMD events may link to several factors. First, vaccination policies were abandoned by the European Union after 1991 due to the successful eradication of FMD. Thus, most countries with a slaughter policy are European and other European pork exporting countries which are FMD-free are the largest beneficiaries. This situation benefits European pork exporters because they have locational advantages and lower transportation costs than North American exporters. Second, though North American and European exporters increase sales when importers adopt a vaccination policy, European exporters still receive larger positive impacts than North American exporters. Consequently, the analysis reveals that European exporters are relatively advantaged when there is an FMD outbreak.

Funding Source
Nat'l. Inst. of Food and Agriculture
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Food Defense and Integrity
Viruses and Prions
Meat, Poultry, Game