Paying for the EHEC food safety crisis

The enterohaemorrhagic E. coli (EHEC) ‘cucumber’ crisis raises many questions. The most immediate is the public health dimension. The scale of the outbreak has been described as unprecedented by public health officials and the cause of the outbreak has yet to be localised. To date there have been 18 fatalities, all but one in Germany, and at least 499 people have haemolytic uraemic syndrome (HUS), a life-threatening kidney disease (see update from a German spokesman here). For comparison, according to the University of Edinburgh National Creutzfeldt-Jakob Disease Research & Surveillance Unit, 209 people have died in the EU (168 in the UK alone) from vCJD (‘mad cow disease’) since 1990.

The outbreak also raises questions once again about the governance of the food system – is the mixture of market incentives, public regulation, legal liability and socially-enforced moral standards of behaviour working sufficiently well to warrant consumer trust in the governance of food safety? How well has the EU food system responded to the crisis? (the DG Sanco website documents the Commission’s response). While agricultural ministers meeting at the informal Council meeting in Debrecen, Hungary apparently accepted that the European rapid alert alarm system worked well, questions will be asked as to why the Hamburg laboratory apparently misdiagnosed the genetic signature of the outbreak, thus wrongly accusing Spanish cucumbers as its cause.

Compensating producers

The economic impacts are still evolving. Once the source of the infection is identified, it will be open to the victims and their families to claim damages from the perpetrator. Another set of costs are borne by horticultural producers across Europe, mainly in Spain but also in other countries, who have seen their markets collapse because of advice to consumers not to eat certain types of raw vegetables, because of a general collapse in consumer confidence, and because of trade bans introduced by third countries such as Russia.

Commissioner Dalli has indicated that the Commission is examining the possibility of providing financial compensation to vegetable growers hit hard by the outbreak. The matter is complicated by the initial Spanish government demands for compensation from Germany for wrongly identifying Spain as the source of the contaminated produce, although German ministers have pointed out in response that official communications did not refer to any source of infection in Spain.

One issue is whether compensation to growers would be provided from EU funds or as national state aid. A recent case of dioxin contamination of pigmeat in Ireland in December 2009 cost Irish taxpayers in excess of €100 million in financial assistance made available to the industry to cover the cost of product recall. In legal terms, this payment was a state aid which was approved by the Commission as a consequence of a situation that could be qualified as an extraordinary event in the meaning of Article 87 (2) (b) of the EC Treaty. This was clearly an incident in a single country which only affected producers in that country.

Lessons from the feed industry

The question of how to finance support to producers adversely affected by a food crisis more generally was raised in the EU feed hygiene regulation adopted in 2005. One of the recitals to this legislation noted:

Successive feed crises have shown that failures at any stage in the feed chain can have important economic consequences. The characteristics of feed production and the complexity of the feed distribution chain mean that it is difficult to withdraw feed from the market. The costs of rectifying the economic damage along the feed and food chain is often borne by public funds. The remedying of this economic consequence at a low cost to society could be improved if the operator whose activity causes economic damage in the feed sector is held financially responsible. However, establishing a general mandatory system of financial liability and financial guarantees, for example through insurance, which applies to all feed business operators may not be feasible or appropriate. The Commission should therefore consider this issue in greater depth, taking into account provisions in existing legislation with regard to liability in other spheres, as well as existing systems and practices amongst the Member States. To this end, the Commission should present a report, accompanied where appropriate by legislative proposals.

This was a watered-down compromise from the Commission’s original proposal. According to Europolitics:

The Commission’s original proposal would have forced all feed producers from the farmer to the processor to take out some sort of financial protection from the costs of cleaning up after a feed hygiene disaster. Strong criticism of this idea has been made by both the Member States and MEPs, led by rapporteur Hedwig Keppelhoff-Wiechert (EPP-ED, Germany). The Presidency compromise removes the teeth from the original Article 8 of the Commission proposal by calling on Member States to “encourage feed business operators to ensure on a voluntary basis” that they have sufficient financial guarantees to deal with a general recall of infected feed. The Commission would have to produce a report within two years on the feasibility of a mandatory system.

Not surprisingly, the EU feed industry felt it was odd to have a measure which called for a mandatory financial guarantee (insurance) for feed producers but not for food processors, although at that time feed was implicated in the majority of European food scares.

The Commission subsequently published a report on the feasibility of financial guarantees in the feed sector. It concluded that financial guarantees were technically feasible but not currently available. The Commission envisaged a wide public debate following publication of the report, but this has not taken place.

This is a pity, as there are important issues at stake in evaluating the merits or otherwise of requiring food and feed businesses in the food chain to cover the costs of food safety incidents. Whether mandatory guarantee requirements should be extended to farmers, as the Commission originally proposed in the case of farmers producing feed ingredients, is clearly even more problematic.

At present, there seems to be an implicit social contract that, in return for accepting strict rules on traceability and food safety standards, farmers and food processors are entitled to compensation from the taxpayer for unexpected losses due to food safety incidents for which they are not responsible. This implicit bargain, in the case of farmers, is something I could support, but it raises the question of double compensation given that support through the Single Farm Payment is also, in part, justified on these grounds.

Update Wednesday 8 June
Yesterday an emergency meeting of the Agricultural Council agreed in principle to a Commission proposal to award compensation to vegetable growers from the EU budget. The payments will be made under Article 191 of the Single CMO Regulation No 1234/2007 which allows for emergency measures, thus justifying them as part of the market support function of the CAP.

The Commission shall adopt the measures which are both necessary and justifiable in an emergency, in order to resolve specific practical problems.
Such measures may derogate from provisions of this Regulation, but only to the extent that, and for such a period, as is strictly necessary.

Commissioner Ciolos made an initial proposal for a budget of €150 million which was estimated to cover 30% of the losses of vegetable producers during June. Payments will be made through Producer Organisations and these will be allowed to provide additional compensation. Apparently most Member States proposed a higher figure seeking 100% compensation, inclusion of a greater number of products, and raising the price base for compensation. Commissioner Ciolos pointed out that there could be difficulty finding the funds in the budget but promised to propose a draft Regulation to the rest of the Commission today (8 June) which would be published within the next 3 days to be approved by the Management Committee on 14 June.

Update Wednesday 15 June 2011
From the EUROPA Press Releases RAPID service 15 June 2011

Yesterday’s Management Committee has voted through an emergency aid package for fresh vegetable growers worth €210 million. This scheme, initiated by EU Agriculture Commissioner Dacian Ciolo?, will allow for the EU to pay producers for cucumbers, tomatoes, lettuce, courgettes, and sweet peppers that have been withdrawn from the market since May 26 as a result of the E-coli outbreak in Northern Germany. The decision foresees paying a maximum rate of 50% of the usual producer price in June. The final figure will only be confirmed on July 22 once member states confirm the volumes that will be covered. The scheme also provides Producer Organisations with some additional flexibility in compensating associated farmers for withdrawals of their vegetables from the market. The Commission Regulation will be published in the Official Journal in the coming days after which producers can apply for support. Following the identification of the origin of the contamination, EU Agriculture & Rural development Commissioner Dacian Ciolo? stated: “I am relieved that the source of the contamination has now been identified, and that consumers can now enjoy fresh vegetables in full confidence. I am optimistic that consumption will pick up very quickly.” On yesterday’s vote, the Commissioner said: “This is an important signal for fresh vegetable growers because I was very keen to show that Europe can react quickly when it needs to. European agriculture has become more and more market-oriented in recent years. However, this crisis again highlights that the market alone is not sufficient for something as strategically important as agriculture. These are elements that we must bear in mind when it comes to fixing the rules and the budget for the CAP after 2013.”