Economic Investigation of Food Supply Chain Homeland Security Issues. AAEA Symposium - 2005

1. Economic Investigation of Food Supply Chain (Homeland) Security Issues. AAEA Symposium - 2005 ���� Jean Kinsey, Co-director, The Food Industry Center Tom Stinson, State (of MN) Economist Professors, Applied Economics University of Minnesota

2. National Center for  Food Protection and Defense A Department of Homeland Security  Center of Excellence�������

3. National Center for Food Protection and Defense Leadership Frank F. Busta, PhD, Director Michael T. Osterholm, PhD, MPH, Associate Director Shaun P. Kennedy, Associate Director

4. Part of a Growing Integrated National Centers Network National Center for Food Protection and Defense (UMN-TC) [NCFPD] National Center for Foreign Animal & Zoonotic Disease Defense (TAMU) [NCFAZDD] Center for Risk & Economic Analysis of Terrorism Events (USC) [CREATE] National Center for the Study of Terrorism and Responses to Terrorism (UMD-CP) [START] Coming: Emergency Preparedness and Response Coming: Border Security

5. NCFPD Vision

6.  �For the life of me, I cannot understand why the terrorist have not attacked our food supply, because it is so easy to do.� Former Secretary Tommy Thompson Health and Human Services �I don't want to get up in public and say the sky is falling if it's not falling. I'm going to try to be very realistic an sensible and serious about the kinds of tradeoffs that we have to consider when we're making decisions about protecting ourselves." Secretary Michael Chertoff Homeland Security In 2001, in one of his first appearance before Congress after the September 11 attack on the World Trade Center, Secretary of HHS Tommy Thompson said �Am I satisfied with the inspections we�re doing? No, I am more fearful about this than anything else.� It is rare to hear such an honest appraisal from a public official in Washington, but September 11th certainly illustrated the need for an assessment of our vulnerabilities. In 2001, in one of his first appearance before Congress after the September 11 attack on the World Trade Center, Secretary of HHS Tommy Thompson said �Am I satisfied with the inspections we�re doing? No, I am more fearful about this than anything else.� It is rare to hear such an honest appraisal from a public official in Washington, but September 11th certainly illustrated the need for an assessment of our vulnerabilities.

7. Goal Oriented: Reduce the potential for catastrophic food system events by: Rendering targets unattractive Rapidly and accurately detecting attacks Responding effectively to minimize consequences Rapid delivery of effective recovery efforts Training new scientists and professionals to deal with threats to the food system

8. Leveraging Unique Advantages Neutral convener for food system issues: Covers the whole food system: pre-farm inputs through consumption. Focused on catastrophic threats (public health or economic). Learn from the past

9. Previous intentional attacks Canada 1970- A postgraduate student contaminated his room mate's food with Ascaris suun, four persons became seriously ill and two suffered respiratory failure. Holland and Germany 1978- A dozen children hospitalized after citrus fruit from Israel was intentional contaminated with mercury Oregon 1984 - Rajneeshee cult contaminated salad bars So, is the threat real? Since that time, we have two real life examples of intentional contamination of the food supply. While these weren�t done by foreign terrorists, they nonetheless illustrate the potential. In 2002, in China, a bakery owner poisons hundreds of people, mostly school children and kills 38, by spiking a competitor�s baked goods with rat poison. And in Michigan, in 2003, a supermarket employee intentionally poisoned 200 lbs of ground beef with an insecticide containing nicotine, and sickened 111 people.So, is the threat real? Since that time, we have two real life examples of intentional contamination of the food supply. While these weren�t done by foreign terrorists, they nonetheless illustrate the potential. In 2002, in China, a bakery owner poisons hundreds of people, mostly school children and kills 38, by spiking a competitor�s baked goods with rat poison. And in Michigan, in 2003, a supermarket employee intentionally poisoned 200 lbs of ground beef with an insecticide containing nicotine, and sickened 111 people.

10. Previous intentional attacks Texas 1996- A disgruntled lab worker China 2001- 120 people became ill when owners of noodle factory laced their food with rat poison Starting in the fall of 2001 and continuing into spring of 2002, bulk milk tanks on dairy farms (14 total) were contaminated with antibiotics. This event may have been a test of the feasibility of an attack using the milk system as a delivery vehicle. So, is the threat real? Since that time, we have two real life examples of intentional contamination of the food supply. While these weren�t done by foreign terrorists, they nonetheless illustrate the potential. In 2002, in China, a bakery owner poisons hundreds of people, mostly school children and kills 38, by spiking a competitor�s baked goods with rat poison. And in Michigan, in 2003, a supermarket employee intentionally poisoned 200 lbs of ground beef with an insecticide containing nicotine, and sickened 111 people.So, is the threat real? Since that time, we have two real life examples of intentional contamination of the food supply. While these weren�t done by foreign terrorists, they nonetheless illustrate the potential. In 2002, in China, a bakery owner poisons hundreds of people, mostly school children and kills 38, by spiking a competitor�s baked goods with rat poison. And in Michigan, in 2003, a supermarket employee intentionally poisoned 200 lbs of ground beef with an insecticide containing nicotine, and sickened 111 people.

11. National Center for Food Protection and Defense A Department of Homeland Security  Center of Excellence������� Who are we?

12. Broad Academic Collaboration

13. Diverse Industry and Association Collaboration

14. Collaborating Across Agencies

17. NCFPD Teams Disposal & Decontamination Safe and effective large-scale means of disposing of contaminated food and decontaminating facilities or sites Detection & Diagnostics Accurate methods for detecting biological and chemical agents in food products Rapid and efficient large-scale testing in a range of production, processing, and retail settings Security in Food Processing & Packaging Enhancing traceability of products in the supply chain Reduce probability of contamination through built-in security design and pathogen inactivation methods Economic Analysis Assessing the potential impact on commerce and trade of intentional contamination Developing strategies for minimizing economic lossesDisposal & Decontamination Safe and effective large-scale means of disposing of contaminated food and decontaminating facilities or sites Detection & Diagnostics Accurate methods for detecting biological and chemical agents in food products Rapid and efficient large-scale testing in a range of production, processing, and retail settings Security in Food Processing & Packaging Enhancing traceability of products in the supply chain Reduce probability of contamination through built-in security design and pathogen inactivation methods Economic Analysis Assessing the potential impact on commerce and trade of intentional contamination Developing strategies for minimizing economic losses

18. The Efficient Allocation of Resources to Prevent Food Terrorism Thomas F. Stinson NCFPD, U of Minn AAEA Annual Meeting July 25, 2005

19. Key Resource Allocation Decisions How much should we spend to protect America�s food supply from terrorism? Should the spending come from the private or the public sector? What is the optimal distribution of spending among various approaches to limiting damages from terrorism

20. How Much Should Be Spent? Currently very little is spent to protect the food supply chain from terrorism Economic theory says spend until the expected value of the reduction in damages from the last dollar spent is equal to $1 Requires measures of the damages and the probability a terrorist event occurs

21. Estimating Losses from a Terrorist Attack on the Food Supply Chain Value of lives lost Costs to the affected firm and industry Export sales of commodities National economic impacts Short-term macroeconomic impacts Longer term macroeconomic consequences due to reduced productivity

22. Macroeconomic Impacts Likely to Dwarf Other Impacts Combination of slower short term growth and lower productivity reduces economic output into the future Economic activity lost due to terrorist action will not be regained Unlike natural disasters food terrorism does not carry with it the forces which automatically stimulate the economy

23. Is There Market Failure in the Protection of the Food Supply Chain? Intuitive arguments Low probability event, protection adds to costs without differentiating product Low probability event, large number of possible targets, impact of firm�s own protection activity is small Full cost of failure cannot be imposed on firms due to bankruptcy protection

24. Is There Market Failure in the Protection of the Food Supply Chain? More formal arguments (Trajtenberg, NBER, 2003) Private protection activities simply shift terrorists� target to another firm Free rider problem makes it unlikely that there will be private contributions to public sector sponsored anti-terrorist activity Economic efficiency requires public sector spending at a level that drives individual protection expenditures to zero

25. Where Should Investments in Protection Be Made? Key intervention points Protection Detection Diagnosis Disposal Food supply chain information

26. A Non-Intuitive Finding Assume 5 alternative terrorist activities All equally damaging with expected value of loss from any one of the 5 alternatives equal to $10 million Terrorists indifferent to which activity they undertake Damages from each terrorist activity can be completely eliminated with an investment of $K

27. A Non-Intuitive Finding (cont) Alternative1 Cost ($K) of completely eliminating possibility of loss is $1.5 million per alternative Total cost = $7.5 million Expected value of losses prevented $10 million Net gain to society from investment in anti-terrorism = $2.5 million Decision � invest in deterrence

28. A Non-Intuitive Finding (cont) Alternative 2 Cost ($K) of completely eliminating possibility of loss is $3 million per alternative Total cost = $15 million Expected value of losses prevented $10 million Net loss to society from investment in anti-terrorism = $5 million Decision --- do not invest in deterrence for any of the alternatives

29. A Non-Intuitive Finding (cont) Does not mean terrorism should go unchallenged Two other possibilities for intervention Identification of terrorists before event Improved tracking information about food supply chain

30. Online information management systems Best practices standards to improve efficiency and real-time information sharing along food chainOnline information management systems Best practices standards to improve efficiency and real-time information sharing along food chain

31. Supply Chain Complexity

32. The Problem: Global Food Systems Bananas � Costa Rica Cheese � Italy Grains � Canada Cocoa � Coit-D Ivoiey Oils � Ireland & France Seafood � Thailand Vegetalbes � Mexico Fruit & Vegetable Juices � China Ground Fish � ChinaRed Meat � Australia Processed Meat � Brazil Shrimp � Vietnam Spices - MadagascarBananas � Costa Rica Cheese � Italy Grains � Canada Cocoa � Coit-D Ivoiey Oils � Ireland & France Seafood � Thailand Vegetalbes � Mexico Fruit & Vegetable Juices � China Ground Fish � ChinaRed Meat � Australia Processed Meat � Brazil Shrimp � Vietnam Spices - Madagascar

33. Research Goals Reduce the potential for catastrophic food system events by: Determining the state of readiness of food companies to deter, detect, and respond to potential terrorist attacks on food or the food system. Share findings with food companies (with anonymity) Suggesting processes and technologies to enhance food supply chain security by: Rapidly detecting potential attacks Responding effectively to minimize damage

34. Research Goals Reduce the potential for catastrophic food system events by: Identifying supply chain vulnerabilities to terrorist activities Training new scientists and professionals to deal with threats to the food system. Build a practical evaluation tool for food companies to use to benchmark themselves

35. Supply Chain & Information Management: the team Summary and Assessment of Supply Chain Best Practices Suppliers (Michigan State) Manufacturers (Michigan State) Distributors (Michigan State/Minnesota) Retailers (Minnesota) Transportation/Service providers (Georgia Tech) Development of New Supply Chain Best Practices Recommendations, Including Formal Standards Online Incident Management System Development

36. Supply Chain Security Practices What have we done so far and where are we going? Interviewed about 20 companies Interview questions Received back written questionnaires from most of these companies Short written questionnaire Tested this with a group of executives in person- Program Leadership Board of The food Industry center

37. Practice Assessment What can and should firms do? Relationships with suppliers and customers Internal processes - use of electronic � real time communications Incident and security management stages Practice rating Likert scaled behavioral scores Security performance characteristics (Incidents, cost, asset utilization, resiliency) Design Larger Survey around 10 core competecies

38. Competency Performance: Structure for Comprehensive Questionnaire

39. Competency Definition Process Strategy � Enterprise philosophy regarding the importance of food supply chain security. Process Management � How people do things, procedures for dealing with internal operations (shipping, receiving, handling, etc.) Infrastructure Management � Presence of gates, guards, fences, seals on containers/trailers/rail cars. Security checks on employees.

40. Competency Definition(Continued) Communication Management � Training, education, and internal communications. Management Technology � Information technology at the collaboration and company level. Designed to facilitate collaboration and information sharing regarding security breaches. Process Technology � Diagnostics, tracking systems to monitor processes. Quality Control of food itself.

41. Competency Definition(Continued) Metrics/Measurement � Guidelines regarding how security is measured Relationship Management � Relationships with suppliers and customers. Public Interface Management � Relationships with government and public. Service Provider Management � Relationship with carriers, warehouses, and other service providers.

43. Phase I. Interview Model Contact company and provide project description Obtain agreement for participation Send functional questionnaire Security Supply chain Security Arrange for on-site interviews with general questions Some conducted by phone

44. Preliminary Findings from Success requires a cultural sensitivity to security. Increased security by hiring consultants to point out vulnerabilities Formed business continuity task forces Stronger focus on security with domestic than international

45. Preliminary Findings Crises handled by a small committee with quality control person in charge � well oiled recall systems in place Larger companies tend to have more security measures in place � some keep data banks on violations/week Back up generators and redundant computer facilities Reluctance to spend money on deterrence � looking for government mandates

46. Challenges Obtaining company participation for interviews and questionnaires. Differentiating NCFPD research from other security supply chain security research Cross-functional Multi-university Supported by DHS Providing appropriate secrecy regarding responses.

47. Summary Defending the food system is a complex challenge Significant continued research needed Communication and cooperation are essential Need analysts for supply chain COST analysis & mapping - See J. Kinsey

48. National Center for  Food Protection and Defense A Department of Homeland Security  Center of Excellence������� Francis (Frank) F. Busta, Director Shaun P. Kennedy, Associate Director University of Minnesota - Twin Cities Campus Office: 200 Dinnaken Office Building925 Delaware Avenue S.E., Minneapolis, MN 55455� USAPhone (612) 624-2458; Fax (612) 624-2157  http://www.ncfpd.umn.edu