Research Accomplishment Reports 2009

The Impact of Food Safety Scares on the Food Supply Chain in an Environment of Highly Integrated Monopolistically Competitive Agriculture

S.H. Saghaian
Department of Agricultural Economics

 

Non-Technical Summary

A key question regarding consumer and producer behavior is how they react when faced with unexpected food safety shocks. Recently, there have been E. coli outbreaks in the fresh spinach market closely followed by an outbreak in the processed beef market. Prior to this, concern was about Bovine Spongiform Encephalopathy (BSE) discovery that received worldwide reporting. This project will explore producers and consumers' reactions to food safety shocks. The purpose of this project is to investigate 1) the market impact of food safety shocks on prices along the supply chain in an environment of highly integrated monopolistically competitive agriculture and food industries; 2) the economic impact of food safety events on consumers' perceptions and preferences and their purchasing habits and behavior; and 3) the economic impact of food safety on producers, supply-channel marketing managers, and retailers, and their strategic responses to food safety incidents.

2009 Project Description

We examined the impacts of BSE discoveries in Canada, Japan, and the U.S. on retail meat markets. No food safety threat inspires more dread than variant Creutzfeldt - Jakob disease (vCJD), an irreversible brain wasting disease contracted from eating beef infected with Bovine Spongiform Encephalopathy (BSE). Consumers often refer to vCJD and BSE interchangeably as "mad cow disease," which can induce fear through uncertain identification, long incubation periods, and devastating symptoms.

Even though most countries have experienced very few BSE cases, such as Canada, Japan, and the United States, and the risk may be exceedingly low, previous studies found conflicting consumer responses to BSE in these low-incidence countries. This research helps reconcile disparities in previous findings by demonstrating the importance of context in determining consumer reactions to a BSE scare. The results help focus attention on strategic risk management options that agribusiness managers can use to guard against shocks to retail beef demand if and when future BSE events occur.

This research consists of three parts that present two complementary statistical analyses. The first part highlights contextual differences in Canada. A double-hurdle model of Canadian fast food beef purchases showed no significant BSE impacts on the likelihood or quantity of fast food beef item purchases. When applied to Canadian supermarket beef purchases, however, a striking pattern emerged. After the initial BSE event in 2003, when media coverage focused mainly on the plight of ranchers, beef demand increased significantly. Moreover, demand increased the most in Alberta, the center of Canada's beef industry. Following two later BSE events, beef demand fell significantly. In the second part, we showed consumer reactions to BSE in Japan using Directed Acyclic Graphs and historical price and quantity decompositions. The Japanese beef markets faced two subsequent cases of BSE discoveries in 2001, eroding consumer confidence in beef supply channels with huge economic losses to the Japanese beef industry. In the third part we looked at BSE's impact along the U.S. supply chain using similar contemporary time-series methods.

The U.S. beef industry faced BSE in 2003, which led to differential impacts on farm, wholesale, and retail markets. Relative to the U.S., Japanese consumers have a strong preference for domestically produced beef, encouraged by retail country-of-origin labeling and BSE media coverage critical of imported beef.

Consistent with these differences in preferences, marketing, and information, we observe more negative and more nuanced reactions to BSE in Japan versus the U.S. The results illustrate the importance of context along at least five dimensions: the food purchase venue, the geographic proximity of consumers to BSE events, the ordering of BSE events, the role of supplier behavior, and the nature of media coverage.

2009 Impact

In Canada if a household recorded at least one beef entree in its preceding report, it was over twice more likely, on average, to buy a beef entree than households who listed no beef entrees in the preceding report. Each additional beef entree recorded in the preceding report was associated with about a 10% higher average probability of a current beef entree purchase, and about 0.17 more beef entree purchases. Promotional deals almost doubled the odds of purchasing a beef entree, and increased the average monthly by 0.34 entres. Households containing married couples and children were more likely to buy beef entres, and more of them. Older consumers, and those for whom English was a second language, were significantly less likely to buy fast food beef entrees. The finding that prices were not significant determinants of beef entree purchases is not entirely surprising when considering the context of fast food purchases. Awareness of typical fast food prices is likely to be high among most consumers, and few lower-cost, low-preparation alternatives are available. Convenience and product attribute preferences are likely to be among the most important demand determinants. Imported beef prices in Japan fell immediately in response to the BSE discovery, but domestic beef prices actually increased.

However, ultimately all beef prices were adversely impacted by the BSE discovery. U.S. beef import prices fell the most dramatically immediately after the BSE discovery and saw the widest difference between the actual and forecast prices. U.S. beef prices rebounded after the first two months, but they took another quick dive after December, reaching their lowest point in May, approximately seven months after the outbreak. Prices of all beef products were lower twelve months after the BSE discovery, a clear indication that the news of the BSE discovery adversely affected consumers' perceptions of beef quality and lowered profit margins.

Yet, the price decrease for the two imported beef types were more than the price decrease for the two domestically produced beef categories. This indicates that Japanese consumers have a more positive view of their own beef products and this keeps the price of their domestic beef products from falling as much as imported products. The results provide incentives for beef producers and retailers to proactively inform consumers about ongoing beef safety measures, and can potentially provide policy makers a basis for countermeasures and compensations.

Beef safety crises have increased the need for robust information technologies in the food marketing system. The BSE situation has certainly created opportunities for producers that have traceable production systems and have quality assurance programs that involve branding and labeling. Proactive information provision in the food marketing systems reduces the impacts of the food scare. The U.S. government and the food industry must continue to invest heavily into procedures that will reduce food safety scares in these areas and into information systems that minimize the impacts of food safety shocks.

2009 Publications

Saghaian, S. L. Maynard, and M. Reed. (2009). The Importance of Context in Determining Consumer Response to Food Safety Events: The Case of Mad Cow Disease Discovery in Canada, Japan, and the United States. In Outsourcing, Teamwork, and Business Management. Karl E. Carettas, Ed. Nova Science Publishers, Inc. Hauppauge, NY, 235-265.

Subrmaniam V., S. Saghaian, L. Maynard, and M. Reed. (2009). Sectoral Growth Interdependencies and the Role of Agriculture in Poland and Romania. Journal of Food Distribution Research, 40 (1): 165-173.

Bayar, E., S. Saghaian, W.Hu, and A. Katchova. (2009). Importance of Nutritional Labels in the Food Industry for Ameliorating the Obesity Epidemic. Journal of Food Distribution Research, 40 (1): 15-21.

Salim, J., S. Saghaian and M. Reed. (2009). Trade Effects of Phytosanitary Protocols: A U.S.-India Almond Trade. Journal of Food Distribution Research, 40 (1): 159-164.

Saghaian, S. and J. Shepherd. (2009). Consumer Behavior, Trust of Information, and Risk Perception to Food Safety Events. In Consumer Behavior. Felix Saito, Ed. Nova Science Publishers, Inc., Hauppauge, NY, 63-85.

Babool, A., M. Reed, S. Saghaian, and V. Subrmaniam. (2009). Food Safety Standards and Export Competitiveness in the Processed Food Industries of Asia-Pacific Countries. Journal of International Agricultural Trade and Development, 5(1): 1-10.

Saghaian, S., G. Ozertan, and A. Spaulding. (2008). The Impacts of Atlantic Bonito Rush and the Avian Influenza on Meat Products in Turkey. Economics Bulletin, 17(16): 1-11.

Akben, E., G. Ozertan, A. Spaulding, and S. Saghaian. (2008). Consumer Responses to the H5N1 Avian Influenza: The Case of Turkey. Economics Bulletin, 4(15): 1-9.

Saghaian, S., G. Ozertan, and A. Spaulding. (2008). The Dynamics of Price Transmission in the Presence of a Major Food Safety Shock: The Impact of N5N1 Avian Influenza on the Turkish Poultry Sector. Journal of Agricultural and Applied Economics, 40(3):1015-1031.