Guest Blog – Denis W. Stearns – “The Market For Peanuts: Why Food In The U.S. May Never Be Safe”

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In the ongoing political (and legal, and historical, and economic) arguments about the regulation of social and economic activity by governments and government agencies, one of the dominant theoretical controversies has been over the answer to this question: Do regulations “interfere” with the market-place by creating unnecessary inefficiencies and higher costs, or are regulations a necessary corrective for the inevitable “failures” of an unregulated (or “free”) market? While this controversy remains justifiably open in the context of the markets for many products and services—e.g., transportation and energy, there is no rational justification for an argument in favor of a “free” market for food.

To begin with, there is no such thing as a “free” market for food because such a market is defined by an almost perfect asymmetry of information. In other words, when it comes to the safety of the food being considered for purchase, the manufacturer and seller knows the relative care that went into production, but the buyer purchases the product based mostly on trust. The inability of consumers to discern the relative safety of their food purchases limits all but a generalized demand for safer food. This is because:

For the most part, food safety is a credence attribute, meaning the consumers cannot evaluate the existence or quality of the attribute before purchase, or even after they have consumed [it].

This generalized demand for safer food, which is applicable to an entire industry or product-category, is thus ineffective in causing the market to enhance food safety. As a result, there is little economic incentive for producers to manufacture food that is safer than that which is required by government regulations. Such regulations therefore tend to act as a ceiling not a floor, and effectively suppress most competition in the realm of food safety. In economic terms, the regulations thus act as a “negative incentive” that prompts a manufacturer to invest what is necessary to avoid non-compliance, but nothing more.

In the case of the Peanut Corporation of America (PCA), you can perfectly see this dynamic in work. Faced with infrequent and ineffective inspections, PCA was free to do what it wanted in its pursuit of higher profits. This included, according this week’s article in the New York Times, Michael Moss, Peanut Case Shows Holes in Safety Net, Feb. 9, 2009.

The conditions at the plant, more circa 1955 than 2009, would have been enough to cause alarm in an industry where sanitation can be a matter of life and death, food experts said.
* * *

But its yellow-brick walls hid the array of poor work conditions and safety flaws, said employees, who lost their jobs when the plant closed on Jan. 16.

Many of the hourly workers earned only minimum wage and had gone years without a raise. Frederic McClendon, 31, a shift supervisor, reached $12 an hour last year but still could not afford health insurance for his two boys, who live in a weather-beaten trailer. “If you pay your workers, you get the best out of them,” Mr. McClendon said. “If you don’t, you don’t.”

Using temporary workers also saved money, said Mr. Hardrick, the assistant manager, “but there was a lot of retraining going on.”

But should any of this be a surprise to anyone? What was the incentive to invest in modernizing the plant, in employee training, and in vigorous internal oversight? There was none, except for the risk that the shocking problem would somehow come to light. And they did not. For years.

In the ironic words of Henry Waxman, D-Calif, words that were not, by the way, intended to be ironic, he asserts that the company's internal records show it "was more concerned with its bottom line than the safety of its customers." What a shock!

But none of this is intended to suggest that updated regulations and increased enforcement will, by themselves, be enough to create an effective market for safe food. The existence of regulations can be just as much a problem as no regulations at all. Rather than worrying about a competitor doing more to improve the relative safety of a product-category—e.g., like bagged fresh produce—regulations can impose a predictable cost that companies can meet, but need not exceed. Thus, even though certain spinach growers had invested far more than others before the 2006 Dole spinach outbreak occurred, the outbreak hurt the market as a whole. The same thing also occurred in 2003 when the price of boxed green onions dropped in one week from $18.30 to $7.23 per box in reaction to the widespread outbreak of hepatitis A infections linked to contaminated green onions used at a Mexican restaurant in Pennsylvania.

Nonetheless, in the wake of the 2006 spinach outbreak, the fresh leafy green industry actively sought regulation, albeit on a quasi-permissive basis. Sensing that certain competitors had already invested in many of the food safety improvements that proposed regulations might require, and that the food-safety bar might be set too high, the green leafy produce industry drafted marketing agreements that would put in place a set of minimum requirements that all market-participants would have to meet to sell their produce. It is notable that the minimum requirements were far less stringent than what one major market-participant already had in place. For example, in one article examining the changes it was noted:

Fresh Express requires an 800-foot buffer between fields of leafy greens and pastures and one-mile buffers between leafy greens and feed lots. "The (leafy greens) metrics could do better, but they certainly set a floor," says Jim Lugg, food-safety chief for Fresh Express.

And so no one should be surprised, that in the case of peanuts, the State of Georgia hopped right to it in tightening the regulation of this important agricultural commodity. Thus, according to an AP Article published today:

A sweeping new food safety measure proposed in the wake of the salmonella outbreak easily passed its first key legislative hurdle Wednesday as Georgia lawmakers sought to reassure antsy residents.

The Senate Agriculture Committee unanimously approved a plan that would require food makers to alert state inspectors within 24 hours if a plant's internal tests show its products are contaminated.

This may all be well and good, but do not misunderstand the real intent here is not to protect the public, it is to protect the peanut industry (from itself). Since the PCA Salmonella outbreak, the sales of jars of peanut butter have dropped 22%, and the spot-price for peanuts is down as much.

But by enacting regulations that mostly rely on self-reporting, the State of Georgia, is aggressively setting the safety bar lower, and potentially heading-off more stringent requirements that might be imposed on a national level. This ultimately will have the effect of leveling the playing field for the rest of the market, and ensuring that all will bear similarly low costs in meeting the “strengthened” safety requirements. While a good public-relations maneuver, this is, in fact, a strongly anti-competitive move that may create a set of safety requirements that are less stringent than what would have likely resulted if market participants had been forced to compete in an open market for safety. And this suppression of higher quality standards is also precisely what the Nobel prize-winning economist George Akerlof predicted in his seminal article “The Market for Lemons,” in which he states:

there is an incentive to for sellers to market poor quality merchandise since the returns for good quality accrue mainly to the entire group…rather than to the individual seller.

In other words, if everyone in an industry pays to the same extent when unsafe or poor quality goods are sold, a greater profit can be made by competing on price not quality, so long as the consumer cannot tell the difference. Such is the case with food products, and thus it remains the public that pays the highest cost for foodborne illness each year.

Finally, there is the important issue of traceability—or, in the case of the United States, the stunning lack of it. In a market where the suppliers of commodities can safely assume that the likelihood of being held responsible is small, and the profit potential of taking the small risk of being caught is high, then no one other than the completely naïve or disingenuous should be surprised by the emails that were yesterday revealed to have been sent by the president and CEO of Peanut Corporation of America, including the one where he directed that contaminated product be shipped—“turn them loose”—and where he wrote in a June 2008 e-mail, "I go thru this about once a week. I will hold my breath .... again." Well, apparently Mr. Parnell never had to hold his breath very long, because he could breathe easy about not being caught—that is until his product managed to sicken and kill enough people to make it impossible not to trace the problem back to him and his indefensibly awful operation.

Of course, the chorus of anti-regulation zealots has already sprang into action, declaring PCA an aberration instead of a case-study. But, at this point, after outbreak after outbreak after outbreak, is it possible that finally, once and for all, the case for the effective regulation of the food industry has been incontestably made? I can only hope so. Because until the market for peanuts—and other food—is made to work for the benefit of the public health, the big profits will continue to go to the companies that cheat, cut corners, and do not care.

Posted on February 12, 2009 by Bill Marler



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