Costs of Meat and Poultry Recalls to Food Firms

Recalls of meat, poultry and processed eggs occur under the supervision of the U.S. Department of Agriculture’s Food Safety and Inspection Service (FSIS). Typically, meat and poultry products that have already been shipped and distributed into the market and are suspected of being potentially hazardous to public health, are voluntarily recalled by firms either by their own initiative or at the request of FSIS. A recall can occur for many different reasons including: foodborne illness outbreaks; products contaminated with foreign materials; mislabeling; undeclared allergens; underprocessed or undercooked products. From 1994 to 2013 FSIS reported almost 1,300 meat and poultry recalls, representing approximately 638 million lb. of product. Nearly three-fourths of the recalls correspond to the most severe class of recalls (see box). Such recalls come at the expense of the firms directly involved and can generate substantial economic losses. As a preventive measure, food firms invest substantial resources to reduce the probability of food safety hazards. However, determining optimal investment is elusive because food contamination incidents are difficult to predict and even more, their probable economic impact is unknown. Assessing the economic impact that may result from a food recall entails a thorough understanding of the costs incurred by firms. However, direct measurement of a firm’s total costs and losses of revenue requires firm-level data that are not generally available. To overcome this limitation, we analyzed price reactions in financial markets during the period surrounding recall events. We expect the effects of a food recall would be rapidly reflected in stock market prices. As such, the magnitude of stock price reactions represents the expected costs incurred by the implicated firms. This magnitude of stock market reactions can be FSIS Recall Classification