Assessing the Duration of Damages in Food Safety Cases

In April 2012, the US Department of Agriculture (USDA) confirmed the fourth case of bovine spongiform encephalopathy (BSE, or mad cow disease) in the country.

According to the USDA, the cow did not enter the animal feed or human food supply. However, incidents such as the discovery of BSE continue to be of great concern to both consumers and producers. For producers, a major issue is the extent to which such incidents depress the prices of the commodities they sell. They often pursue litigation to attempt to recover associated losses.

Measuring the extent and duration of any price changes resulting from food safety incidents – and thus proving actual harm – is difficult, however. Producers may sell their goods on a cash basis for immediate delivery; such “spot market” sales involve prices that vary by location and time, and records of these transactions are rarely maintained for long periods. More recently, however, the marketing of agricultural products has become increasingly complex, and spot market sales are giving way to alternative marketing arrangements.

Given the difficulties in observing actual transaction prices, analysts often focus instead on the reaction of prices in centralized futures markets. For example, the initial report by Reuters of the April 2012 BSE incident indicated that “US live cattle futures tumbled more than 2 percent on Tuesday for their biggest drop in seven months, hit by rumors of a new, domestic case of mad cow disease that later received government confirmation.” Futures prices are appealing as barometers of marketwide economic forces, but their use in litigation to assess specific damages claims poses challenges. At any one time, there are several futures contracts for a commodity being traded (for example, six contracts for live cattle), each with a different delivery date. Individual futures contracts are likely to respond differently to food safety incidents because commodity market participants often find ways to adjust to the incident – consumers may find new sources of supply, producers may find alternate sales outlets, and regulators may adopt new monitoring procedures. As a result, futures contracts with later delivery dates tend to be affected less than contracts for near-term delivery.

The smaller declines associated with the later-delivery contracts indicate that futures traders did not consider the near-term changes in cattle prices to be a permanent response to the BSE incident. If they had, all the futures contracts would have fallen by the same amount. Overall, the traders in live cattle futures behaved in a way that was consistent with the idea that, with more time to adjust, the price effects of bearish news about BSE would be muted. As this example suggests, the timing of each producer’s sales can be critical for determining the extent and duration of damages associated with food safety incidents. The wealth of price information from centralized futures markets provides opportunity – and reason for caution – when it is used in legal proceedings. ■

Adapted from “Food Safety Concerns: Impact on Prices and Producers” by Affiliate George Kosicki, Ph.D., Managing Principal Ted Davis, and North Carolina State University Professor and academic affiliate Walter Thurman. The article appeared in the January/February 2013 issue of FDLI's Update.