Value-at-Risk and Food Safety Losses in Turkey Processing

Abstract

Food safety risks and microbial outbreaks have significant health impacts on society as a whole, as well as economic loss to food processing firms. According to the U.S. Centers for Disease Control (CDC), an estimated 76 million foodborne illnesses occur each year in the United States. Of these cases, 325,000 hospitalizations and 5,000 deaths occur each year (Mead et al., 1999). The U.S. Department of Agriculture, Food Safety and Inspection Services (USDA-FSIS) (1996) estimated that approximately 4,000 deaths each year are attributed to contamination in meat and poultry products. For food processing firms, microbial outbreaks often result in significant economic losses: food recalls, lost market share, and decreased consumer confidence. The intangible nature of aggregate economic losses makes it difficult for firm managers to predict firm-level economic impacts of food safety losses and adopt effective risk mitigation strategies. Developments in Value-at-Risk (VaR) methods provide an analytical framework to resolve this problem. This report develops VaR models to predict food safety risks in turkey processing, under alternative risk mitigation strategies. The FSIS records of food recalls from 1994 to 2003 indicated that as much as $1.35 billion in losses were realized in the turkey industry. The objective of this report is to determine the firm-level risk reduction capabilities and performances of Pathogen Reduction/Hazard Analysis and Critical Control Point (PR/HACCP) systems using VaR and out-of-sample testing for robustness of findings. The VaR results suggest that characteristic turkey processing plants, on average, were losing $0.06905 per lb not more than 5% of the time in any given month in the period prior to PR/HACCP implementation. However, after PR/HACCP implementation, turkey processing plants were losing $0.04936 per lb. In the period after PR/HACCP implementation, losses incurred under generic and augmented PR/HACCP for the small turkey processing plant were not significantly different. The out-of-sample tests indicated that VaR was adequate in predicting firm-level food safety economic losses. The results of this report provide private and public policymakers with alternatives to improve PR/HACCP implementation.