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Risk Management Archive

Debt and American Chicken Farming

August 2, 2016

 

"What do you mean 'I have to move'? I live here."

“What do you mean ‘I have to move’? I live here.”

This handy infographic explains the economics of poultry production from the perspective of the typical American chicken farmer. It’s not just a tough life: farmers bear a great deal of the economic risk (in the form of debt) that allows you to buy that cheap broiler bird in the supermarket. Farmers take on long-term debt in the hope of acquiring short term poultry production contracts, the terms of which are skewed in favor of the big poultry buyer.

Does this knowledge encourage you to buy from a farmer that does not participate in the “Big Chicken” system?

Hat-tip, Jordan Green – Farmbuilder.

Lessons Learned From Massive Recalls Due To Peanut-Tainted Cumin

February 20, 2015

by Lauren Handel

FDA recently issued a consumer advisory warning people who are highly allergic to peanuts to avoid products containing ground cumin because peanut protein has been detected in some cumin shipments. Since last December, I have noticed many recalls due to undeclared peanuts in products containing cumin, and I have been wondering what’s going on. How could so many companies be affected by peanut protein in cumin? I have been surprised that, until now, FDA has been silent about the issue, and it has not attracted media attention. Thankfully, Allergic Living magazine has investigated and found some answers, although many questions remain.

cuminAccording to Allergic Living’s investigation, there have been two waves of recalls, which have been traced back to two Turkish suppliers of cumin — although the peanut contamination may have originated farther back in the supply chain and the cause of the contamination is unknown. Allergic Living’s investigation found that the largest set of recalls began in December 2014 when it was discovered that an American company, which had been supplied by one of the Turkish companies, sold a peanut-tainted batch of cumin powder to at least 38 other companies. Those 38 companies, in turn, have supplied cumin products to other companies, further expanding the recalls. According to Allergic Living, 580,000 pounds of beef, pork and chicken have been recalled to date. Whole Foods alone has recalled more than 100 products. Allergic Living has a list of the recalls, which is broader than the one included in FDA’s consumer advisory.

This wave of recalls demonstrates how a problem triggered by one ingredient supplier can cause a ripple effect throughout the supply chain. It also reinforces the importance of supplier verification. Few, if any, food companies have control over the production of every ingredient or raw material they use. Rather, manufacturers must rely on their suppliers to provide unadulterated, accurately labeled products that meet the manufacturer’s required specifications. Supplier verification ensures that such reliance is well placed. It should include review of a supplier’s food safety and production practices, periodic audits, and product testing and/or certificates of analysis.

The growing number of cumin-related recalls also shows that companies down the supply chain are likely to bear the costs of a supplier’s problem. Recalls can be very expensive and devastating for smaller companies that can’t afford recall insurance. Recalls also can harm a company’s reputation and cause it to lose customers and, therefore, revenues. This is why companies should have contracts with their ingredient suppliers requiring the supplier to indemnify the buyer for its costs and losses in the event that the supplier’s problem causes a recall. Such contracts also should explain what each party’s roles and responsibilities will be in the event of a recall.

We will continue to follow the news on the cumin-related recalls.

Smart Leases for New and Beginning Farmers

February 12, 2015

by Jason Foscolo

Everyone interested in becoming a farmer should read this piece from Salon entitled “What nobody Told Me About Small Farming: I Can’t Make a Living.” The author, Jaclyn Moyer of South Fork Farm in Placerville, California, shares some important insights into the financial hardships that are a fundamental part of being a new farmer. As you can tell from the title of the article, she is open and honest about the financial difficulties she and her partner face. This kind of honesty is too rare within the new and beginning farmer movement, and Ms. Moyer should be commended for sharing her insight with such candor.

This bit go us thinking about the importance of good negotiating during the agricultural leasing process:

I didn’t say that despite the improvements we made to the land— the hundreds of yards of compost we spread, the thousand dollars we spent annually on cover crop seed to increase soil fertility, every weed pulled — we gained no equity because we didn’t own the land.

The loss of equity is an astute observation that not many tenant farmers realize, and it’s particularly true for South Fork, which is organic certified according to its website. It is more challenging and expensive to increase soil fertility when working within the restrictions imposed by organic certification. These additional costs do indeed amount to a transfer of equity from the tenant to the landholder. When farm tenants assume costs in order to improve soil quality, we generally recommend negotiating either for:

  • A rebate that returns all or some of the cost of those agricultural practices to the tenant; or
  • A long term lease that enables the farmer to recoup the expenses over several seasons.

Soil fertility is not some switch that can be turned on. Often it takes several seasons for farmers to achieve their desired profile. It is, therefore, important that the farmer gets a lease that allows them to stay on the land long enough to reap the benefits of their efforts. For farms that are converted from conventional to organic production, a year-to-year lease is not advisable.

It sounds like an easy case to make for a farmer, but sustainable lease agreements require sustainable landlords. Private landowners may not always appreciate the additional effort and expense incurred by farmers like South Fork. Land trusts, however, have the nonprofit motive to promote conservation and soil-enhancing agriculture, and are ideally placed to execute terms that recognize the capital contribution some farmers make to their soil.

Listeria outbreak linked to apples serves as reminder of the liabilities food businesses can face

January 12, 2015

by Lauren Handel

The recent outbreak of Listeria monocytogenes linked to commercially-produced caramel apples, has been traced to the apple distributor, Bidart Brothers of Bakersfield, California. As of January 9, 2015, the outbreak has caused 32 people to become infected in 11 states and contributed to three deaths. Bidart Brothers and three manufacturers of caramel-covered apples have issued recalls.

imgres-3Events like this remind us that food — even a product as seemingly innocuous as an apple — can be dangerous. For that reason, it is critically important that growers, manufacturers and other sellers of food products employ rigorous food safety practices to try to prevent hazards and plan ahead to be able to effectively recall products in the event that something goes wrong.

It is also important to understand that, no matter how careful a food manufacturer or supplier may be, it can be held strictly liable for all damages caused by contaminated food. Strict product liability means liability without regard to fault. In other words, an injured party may recover without having to prove negligence or intentional wrongdoing. The only way for a business to protect itself from such liability is to have insurance and contracts that appropriately put the responsibility for losses on the party that caused the harm. Food manufacturers and sellers, therefore, should make sure that their business liability insurance includes adequate product liability coverage and that their agreements with suppliers and customers include enforceable indemnification and insurance provisions.

Raw Milk Liabilities and Independent Certification

August 15, 2014

by Jack Hornickel

NPR recently highlighted a new tool for raw milk producers: third-party quality control standards and independent certification. The Raw Milk Institute (RAWMI), a non-profit that supports a strong and safe raw milk industry, has published safety criteria for raw milk producers. If farmers meet RAWMI’s Common Standards and draft an adequate Risk Analysis and Management Plan, they can be listed on the RAWMI website as exemplar producers of “reliable, clean raw milk.” Doctors, veterinarians, epidemiologists, farmers, and consumers all participated in developing the safety measures.

The Common Standards include water and milk testing that probes for the presence of coliforms, salmonella, listeria, and E. coli. They also require testing the dairy herd to ensure the animals are free of tuberculosis and brucellosis. The Risk Analysis and Management Plans are developed uniquely for each farm. Generally they must address contamination risks that occur during animal transportation, cleaning of milk containers, management of bedding and manure, feed storage, and contact with farm employees. The Plan mandates responsible reflection on the entire dairy process and seeks to identify all points where contamination can occur, thereby mitigating risk.

By mitigating the risk that a consumer may become ill, RAWMI’s standards should also minimize exposure to civil lawsuits. However, compliance with such voluntary standards will not immunize a raw milk producer from civil liability or from criminal liability where raw milk sales are illegal. Because raw milk laws are different in each state, the independent certification offered by RAWMI will have varying effects depending on the location of the farm.

In New York, for example, dairies can sell raw milk from the farm after receiving a license. The standards for obtaining a license are similar to the RAWMI Common Standards but require additional testing for staphylococcus and organisms that cause mastitis in dairy cows. New York also requires farmers to post a sign reading, “Raw milk does not provide the protection of pasteurization.” Thus, raw milk producers that are independently certified by RAWMI are well on their way to being licensed by the state. By taking a few extra steps, farmers would be shielded from criminal liability.

New Jersey is another story. In that state, all sale of raw milk for human consumption is illegal. The RAWMI certification will do nothing to protect a New Jersey producer from criminal prosecution. In fact, listing on the RAWMI website is likely to draw attention to the illegal enterprise, and the paper trail of bacterial testing and food safety plans is evidence that can be used in a prosecution. Here, independent certification would raise the chances of criminal liability, despite the farmer’s honest attempt to provide safer food.

Now for the final twist: RAWMI’s standards will have only a minimal effect on farmers’ civil liability. In every state, raw dairies face strict liability in civil lawsuits for harms caused by the food products they sell. If anybody becomes sick from consuming a raw milk product, the producer can be held liable for the consumer’s injuries, even if the producer followed the highest safety standards. Raw dairies, like all food producers, have an absolute duty to make a safe product. The only effects RAWMI’s certification could have in a civil lawsuit might be to insulate the farmer from a negligence claim, an alternate theory on which a consumer could sue, as well as punitive damages.

RAWMI’s certification is a practical step forward, falling short of a legal solution. The Common Standards and Risk Analysis and Management Plan are a laudable attempt to legitimize and create industry-wide standards for the raw milk industry. However, they will have varying effects on farm liabilities, and farmers still must continue to navigate the patchwork of state laws. For a comprehensive guide to state raw milk laws, visit the Farm-to-Consumer Legal Defense Fund website.

Insurance Options for Organic Farmers

July 10, 2014

by Jack Hornickel

The USDA’s Risk Management Agency (RMA) is on its way to providing insurance coverage for all organic crops, but farmers may have to wait another growing season before their investment is accurately protected by federal insurance programs. The trouble is that certified organic crops fetch higher sales prices than conventionally-grown crops; yet most organic crops only can be insured at conventional rates because the data for organic pricing remains limited. Previously, only three organic crops were priced: corn, soy, and cotton. The 2014 Farm Bill instructed RMA to determine pricing for all organic crops “as soon as possible, but not later than the 2015 reinsurance year.” While the beginning of the insurance year varies per crop, the RMA is nowhere near establishing price rates for all organic crops.

A recent RMA update tracks its progress and strategic plan moving forward. In addition to corn, soy, and cotton, the RMA has now established price rates for organic:

  • almonds (only in California),
  • apples, fresh (Idaho, Oregon, and Washington),
  • avocados (California),
  • blueberries (all types in California; Early to Late Highbush type in Oregon and Washington),
  • grapes, Concord (Oregon and Washington),
  • oats,
  • pears (Oregon and Washington),
  • peppermint,
  • peaches, nectarines, plums, and apricots (California),
  • stonefruits, fresh (Idaho, Oregon, and Washington), and
  • tomatoes, processing (California).

Clearly, the RMA has a long way to go before all organic farmers are fairly protected. Those on the eastern seaboard are particularly out of luck. Until the RMA is able to collect more robust and regional data that establishes the true value of organic production, federal insurance programs will continue to cut short on organic farmers.

In the meantime, the RMA recommends the following insurance programs that organic farmers can use to protect themselves at full organic value:

  • Contract Price Addendum – If organic farmers are growing crops under contract, they can use the contracted sale price as a price rate for federal insurance programs. This method can even be used for organic crops that have established price rates, providing insurance that is more reflective of the actual crop value. Currently, this coverage is available for 62 organic crops.
  • Actual Revenue History – This pilot program offers insurance based on the farmer’s actual documented revenue, protecting against losses based on yield, price, and/or quality. Unfortunately, the program is only available for cherries, navel oranges, and strawberries and limited to the states of California, Idaho, Oregon, and Washington.
  • Adjusted Gross Revenue and AGR-Lite – Based on income reported on federal tax returns, organic farmers can insure any agricultural production. AGR is available selectively by state, and AGR-Lite is available almost everywhere.
  • Whole Farm Revenue Protection – Designed for diversified farms, this new pilot program allows farmers to insure an entire farm rather than a specific commodity. Whole Farm Revenue Protection uses the same calculation as AGR and AGR-Lite but increases coverage. More information will be available later this summer.

Due Diligence for Food Businesses

October 14, 2013

We’ve often been asked the question “How do I invest in a food business if I am not from the food industry?” The answer is that this building value in a food business requires a very particular knowledge base.

jarAny round of investment is preceded by due diligence, a type of audit that seeks to substantiate the value of a business. Compliance with regulation is a very big part of the budget of any food business. Regulatory costs are a particularly salient issue for investors looking to make a solid bet, or for entrepreneurs seeking equity funding. Food entrepreneurs need to appreciate the wealth they create by building businesses which internalize the costs of regulation, and investors need to be able to identify the gaps in compliance that may jeopardize the return on investment. No secure wealth can be created without paying heed to regulatory compliance.

On October 15, we are going to help shed some light on the situation. In conjunction with Slow Money NYC, tomorrow Jason and Lauren will be teaching a workshop entitled “Due Diligence for Food Businesses: What Investors and Entrepreneurs Need To Know”. We will be discussing the various laws and regulations central to our Food Law practice that can affect the value of a food business, such as:

  • Food and nutrition labeling requirements
  • Liability, indemnification, and insurance.
  • Food safety regulations such as the Food Safety Modernization Act.
  • Labeling and Marketing Claims
  • Agricultural lending, the Uniform Commercial Code, and secured transactions.
  • Chapter 12, Agricultural Bankruptcy.
  • Perishable Agricultural Commodities Act, the Agricultural Fair Practices Act, and the Packers and Stockyards Act.
  • Environmental liability and compliance.

Reserve your spot through MeetUp.

FDA Study on Soft Ripened Cheeses

April 23, 2013

Back in February, the Food and Drug Administration released a food safety risk assessment of domestically produced, soft ripened cheeses. This category of cheeses consists of a wide variety of those produced by artisans and farmstead producers across the United States. This category also contains several raw milk cheeses, the production of which drew particular scrutiny in the FDA’s Risk Assessment.

Oozing, stinky cheeses are a likely target of increased regulation

Though it has not been overtly stated that this Risk Assessment lays the groundwork for more stringent regulation of soft-ripened cheeses, that seems like a logical next-step for the FDA.

The American Cheese Society is the industry group representing cheese producers in the United States. We’ve had the pleasure of working with its Academic and Regulatory Affairs Committee to submit a response to the Risk Assessment, which you can read in its entirety here. ACS has taken the (justifiable) position that the Risk Assessment exaggerates the dangers posed to human health by this category of cheeses. As the ACS response states:

We are concerned that the conclusions and take-away messages from the risk assessment may be based on an incomplete data set and thus may not be wholly accurate. First, the report suggests to consumers and regulators that soft-ripened cheeses carry a high risk of contamination with Listeria monocytogenes; when in fact, the evidence and history suggest that the risks are low from such cheeses made in compliance with current regulations. Second, as reflected in media coverage, the report suggests that soft-ripened cheeses made from unpasteurized milk are significantly more risky than those made from pasteurized milk; when in fact, the analysis indicates that at least one strategy considered in the report can reduce risk in raw milk products below that of pasteurized products.

The ACS response then goes on to draw attention to the specific shrotcomings of the Risk Assessment, such as its failure to analyze the simple preventative measures that can increase food safety without detracting from the character or production efficiency of cheese, the Assessment’s data set which drew from commodity milk suppliers and not small-scale producers, the Assessment’s reliance on data gathered from foreign producers, and so much more. Read the whole Response.

You might also want to check out an excellent piece on the Risk Assessment by our favorite writer, Clare Leschin-Hoar, written late last week.

If you are in the cheese business, or if you are just really passionate about your local cheese producers, this Risk Assessment concerns you. You need to do a few things immediately:

  • Read the FDA’s Risk Assessment for yourself;
  • Read the ACS Response to the Risk Assessment;
  • Head to the Federal Register at federal register.gov and search for Docket Number FDA-2012-N-1182;
  • Click on “Comment Now” and tell the FDA what you think about the Risk Assessment, your emphasis on food safety during production, and how the Risk Assessment might affect your farm or your business

The Risk Assessment has been published for public review. Please feel free to submit your comments to the FDA and the Risk Assessment. FDA actually listens to these things if the submissions are intelligent and well-conceived, so you actually can affect the process of rule-making by going through these steps. This is how food laws are made.

The deadline for submission is Monday, April 29, 2013.

Food Law Advice for Restaurants That Source Their Own Ingedients

September 12, 2012

My restaurant clients always tell me how maddening and insufferable it is to be asked repeatedly “Is it local?” by their patrons. Though they appreciate the curiosity and the enthusiasm of their customers, owners are already very, very aware of the pressure to do their own sourcing. The Nation’s Restaurant News has some excellent guidance for restaurants looking to make a connection with a local source in “Five Steps to Local Sourcing For Restaurants”.

A few suggestions of my own from the Food Law toolkit:

1. Risk management. If a restaurant plans to do its own purveying, it has to assume the food safety management role of a broad line distributor like Sysco or Chef’s Warehouse. The food safety geeks at the big distributors always have a thermometer handy, they periodically inspect their producers’ facilities, and they will not do business with a producer who does not agree to assume most of the food safety risks inherent in the production process. Any restauranteur who wants to source locally has to be equally scrupulous. The food safety on some farms is superb, but it is not always the case. It is possible to screw up something like spinach and grievously injure a bunch of people without regard to farm size. Strict liability, a food product liability doctrine I rhapsodize about often, places liability for the injured customer on the entire food chain. That means everybody in the supply chain has the obligation, both moral and legal, to police each other.

A restauranteur might want to read a few good books on food production safety, or contact a local agricultural extension office for guidance on good agricultural practices. That should arm the restauranteur with enough information to ask the farmer the tough questions (Do the chickens have free reign of the area where the snap peas are grown? Do farm laborers have access to field sanitation? Why is there a cat running around the creamery where the artisanal cheese is made?) Conduct a site visit of the place where you source. If you see puddles of motor oil underneath the old tractor adjacent to the melons, move on to another source. Do not deal with amateurs – they are more likely than professionals to cause harm somewhere in the food chain. If you don’t get the impression that safety is a priority, or if they give you some mumbo jumbo that food safety is only a problem on “conventional” farms, the person is deluded and you should move on.

2. Contracts. If you truly want to support local producers, offer to pay for the crop before it is put in the ground. The truly professional farmers hate economic risk and will commit their time and dirt to grow for you if you make a legally enforceable promise to buy before the season begins. This is done all the time in the agricultural industry, and this practice is starting to trickle down to the small, local farms. Of course, a contract can and should include criteria for quality control, condition of goods upon delivery, and time of delivery. If the farmer fails to deliver, the restaurant can always go right back to the broad-line distributor, so the risk to the menu and the restaurant is minimal in the event of default.

 

Creative Methods of Drought Relief

August 16, 2012

A modicum of good news for drought-beleaguered farmers. More government agencies are stepping up to provide relief. Frequent Food Law contributor Emilie Cajigas is here with details:

News of the worsening U.S. drought continues to plague the headlines. More than half of all U.S. counties have been designated disaster zones, with some areas reaching the D3 and D4 drought intensity levels. In an effort to assist U.S. Farmers during this time of need, the USDA issued a press releaseon August 8th which announced the various steps the current administration is taking to assist farmers. Many of these steps exhibit some admirable regulatory deftness:

Within the last month, USDA has opened the Conservation Reserve Program to emergency haying and grazing, has lowered the borrower interest rate for emergency loans, and has worked with crop insurance companies to provide more flexibility to farmers. USDA has also announced the following:
  • Allowing producers to modify current EQIP contracts to allow for grazing, livestock watering, and other conservation activities to address drought conditions.
  • Authorizing haying and grazing of Wetlands Reserve Program (WRP) easement areas in drought-affected areas where haying and grazing is consistent with conservation of wildlife habitat and wetlands.
  • Lowering the reduction in the annual rental payment to producers on CRP acres used for emergency haying or grazing from 25 percent to 10 percent in 2012.
  • Simplifying the Secretarial disaster designation process and reduced the time it takes to designate counties affected by disasters by 40 percent.

Even the U.S. Small Business Association has stepped up to offer farmers the Economic Injury Disaster Loans (EIDL). “Those eligible for these loans are small businesses, small agricultural cooperatives, small businesses engaged in aquacutlure, and most private nonprofit organizations of all sizes that have suffered substantial economic injury resulting from a physical disaster or an agricultural production disaster (as designated by the Secretary of Agriculture).”  In order to receive an EIDL loan, you must fill out an application, which can be done online. After you file, SBA inspector will be sent to estimate the damage incurred in order to gauge the amount of assistance required by individual need.