impact of HACCP on costs and product exit, The

Journal of Agricultural and Applied Economics, Apr 2002 by Hooker, Neal H, Nayga, Rodolfo M Jr, Siebert, John W

ABSTRACT

Detailed information on firm level food safety costs is reported. Survey data for small and very small meat processors are modeled. Economies of scale in implementing Hazard Analysis Critical Control Point (HACCP) systems are investigated. Results indicate that even after controlling for scale, very small plants incur higher compliance costs. Diseconomies of scope are assessed using the probability and number of products discontinued due to HACCP Such "partial exit" is positively related to the current range of items produced and the need for facility modification. However, no evidence is found for higher levels of partial exit in very small plants.

Key Words: HACCP, economies of scale, firm and product exit, food safety strategies, meat processing.

The Hazard Analysis Critical Control Point (HACCP) system has been the subject of intense political, technical, and economic analysis in recent years. This paper continues this assessment, presenting findings from the analysis of data gathered from meat processing plants in Texas on two impacts of the United States Department of Agriculture (USDA) rule that have previously received limited attention. Specifically, the cost of implementing the requirements in small and very small meat processing plants and the potential reduction in the product range offered by these plants termed "partial or product exit" are modeled. The importance of plant size, sales, process complexity, related infrastructure and training costs are evaluated for their roles in determining the overall impact of the rule.

The number of meat processing plants in Texas declined by about 53 percent from 1982 to 1996 leading to great concern in the industry about how to enhance the profitability of meat plants and prevent further exit. Siebert, Nayga, and Thelen (2000) found that for smaller meat plants, return on assets (ROA) averaged 63 percent among the top quartile of plants examined. However, the bottom quartile's ROA averaged only 8 percent, making such firms highly susceptible to any of the multi-dimensional risks inherent in today's food processing industry. Food safety-risk mitigation strategies in particular are becoming increasingly important and, therefore, are the focus of this paper.

There are concerns that the USDA HACCP rule may have disproportionally impacted smaller meat processors and led to a reduced number of products being offered by the firms. This paper attempts to examine this using data collected through a survey of meat processors in Texas conducted in 1999 prior to full implementation of the rule (small plants were required to have a HACCP system in place by January 25, 1999 and very small plants by January 25, 2000).' The data set has a range of small and very small plants.

Background

Reactions to public health risk have brought about sweeping changes in the U.S. meat processing sector. USDA's Pathogen Reduction; Hazard Analysis and Critical Control Point (HACCP) Systems; Final Rule (USDA 1996) represents possibly the largest single regulatory change to impact the meat industry. It requires almost all meat and poultry processors of all sizes to implement sophisticated HACCP-based systems for each product or process.2 Unnevehr (2000) presents an excellent range of economic evaluations of the USDA rule and other applications of the HACCP system around the world. These studies include analyses of the costs and benefits and potential market structure impacts of HACCP-based systems and serve as the basis for this paper.

The meat slaughter and processing sectors are characterized as having a "dual" market structure. While heavily concentrated for large plants, there remains a large number of small and very small federal and state-inspected plants. It is these smaller plants that may potentially be most influenced by the HACCP rule. Such changes in market structure are discussed in MacDonald and Crutchfield (1996). The authors highlight the importance of considering plant heterogeneity (such as firm size and product mix) in forecasting HACCP compliance costs in order to determine if separate benefit measures for such plants are necessary (p. 1290). The regulatory impact assessment of the final rule argues that any cost disadvantage placed on smaller plants would be negated by the extended timeframe allowed for compliance (USDA 1996, p. 38986). The forecasted final implementation costs of the regulation were estimated to be between $0.0011 to $0.0013 per pound, with annual recurring costs of between $0.0015 and $0.0018 per pound. These projections differ significantly from the total cost measure (the sum of recurring and non-recurring costs) reported in this paper (averaging just under $0.05 per pound-- erage compliance cost of $0.05 per pound may be compared to the estimates of Antle (2000) who modeled HACCP costs, determining a range of $0.03 to $0.17 per pound (p. 93). Further, reporting on survey results conducted prior to full HACCP implementation, Nganje and Mazzocco (2000) found a range of compliance costs between $0.0004 and $0.4351 per pound. Clearly there is considerable variability and uncertainty in each of these measures. Our own survey respondents reported per pound costs between $0.02 and $0.20 per pound.