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Government User Fees And The Inherent Conflict Of Interest They Create

With all the severe fiscal problems government at all levels is experiencing, there is a temptation to impose lots of user fees on industry. In fact, it is hard to imagine how the Food Safety Bill that President Obama pushed will ever be funded without substantial user fees. There is just no budget for all the inspections called for in the law. Yet user fees create a horrible conflict of interest for regulatory agencies.

King 5 News in Seattle did a report titled, Mold at Washington Food Plant Reveals Flaws in Food Safety Net. In reality, it showed the conflict of interest created when governmental organizations depend on user fees:

Federal inspectors knew of serious food safety violations at a Washington state fruit processing plant. It seemed like the kind of thing that the United States Department of Agriculture would jump on. But that’s not what happened.

Government whistleblowers tell the KING 5 Investigators that the agency was more concerned about the money Snokist was generating for the USDA than the safety of the citizens it serves.

“I think it’s pretty poor,” said Wendy Alguard, the USDA’s former inspector assigned to Snokist. “All (the USDA) is out to do is try and make money, instead of doing what their original job is, being concerned about the product and the safety of people,” said Alguard.

“Money, it’s money,” agreed Jerry Pierce, the USDA inspector who as Alguard’s predecessor at Snokist.

The substantive complaint was that Snokist was reprocessing moldy applesauce:

The inspectors say they witnessed employees “reprocessing” large bins of moldy applesauce. Snokist workers scraped mold off the top of spoiled applesauce, heat-treated the remaining applesauce and then mixed it with fresh applesauce to sell it to the public.

“It’s appalling that a company would take those measures just to make a few dollars,” said Alguard.

Both inspectors said they considered the reprocessing a health hazard and immediately reported it to their boss at the USDA. 

But they say the USDA never put meaningful pressure on Snokist.

Records obtained by the KING 5 Investigators show the reprocessing continued for more than three years.

It is not 100% clear that this is against some rule or even that it is a health hazard. The applesauce was moldy, not contaminated with E. coli 0157:H7 or other lethal pathogen, and Snokist heat-treated the applesauce. Assuming the heat treatment worked as designed, there should not have been any health hazard.

Still it is hard to believe that organizations such as Costco, Gerber and Kroger — all of which were buying applesauce from Snokist during this period would have found this acceptable.

In other words, this was really a quality, not a food safety, issue at all, which is consistent with what the USDA is saying about the issue:

In a written statement, the USDA told KING 5 that its inspectors were “diligent” about keeping the reprocessed applesauce out of the national school lunch program. Snokist was a major supplier of fruit products and bid on school lunch contracts across the United States.

But the USDA says its employees don’t have the authority to halt questionable applesauce that could be going to non-government contracts.

Yet it does seem an idiosyncratic interpretation of the rules regarding the USDA inspections in the plant to say that a plant that does unacceptable things is OK, as long as they segregate. There is little question that the USDA could have simply said that the risk of such “segregation” efforts failing was too great and that it wouldn’t certify anything from the plant as acceptable for the school lunch program unless the whole plant operated to standard.

Why didn’t the USDA err on the side of caution? The former inspectors seem to have a good handle on the motivations:

The former inspectors think the USDA could have cracked down on the company, but say their boss didn’t want to lose the “fees” Snokist was paying the USDA to remain in the school lunch program.

Records obtained by the KING 5 Investigators show Snokist paid more than a half-million dollars in user fees to the USDA in just over three years. The fees pay for USDA inspections and services to monitor the food Snokist is sending to USDA programs like school lunches and food banks.

The inspectors believe their boss ignored their concerns about the applesauce because he didn’t want to lose the money Snokist’s contract brought in to the USDA.

“It was a good boost for my supervisor,” said Pierce. “It made him look good in the western region as well as Washington, DC.”

In other words, the point is that regulatory personnel are not indifferent to the user fees. If Snokist was closed down and a New York State facility got the business, then the western region supervisor would lose staff, power and influence with his bosses. His odds of promotion would be lessened.

It is worth remembering these types of incidents and the inherent conflict of interest the next time someone starts pushing user fees to pay for regulatory activities, especially those related to food safety. If you scroll over the image below you can watch the news report.


Marion Nestle On Organics, Crop Yields And Food Politics

Our piece, Organics, Crop Yields And Feeding The World, brought many letters and public comments, including an article from one of the most prominent food analysts writing today.

Marion Nestle, the Paulette Goddard Professor in the Department of Nutrition, Food Studies and Public Health at New York University and the author of many food and food policy related books, is often perceived by many in the trade as an enemy of the food industry. We find her enormously thoughtful and willing to ask many questions that are sometimes uncomfortable for the trade to address. We don’t always come down on the same side as her, but we always find reading her to be a wise investment of our time.

She recently wrote a piece titled, The Endless Controversy Over Organics, which focused on our interview with Dr. Steve Savage. As usual, Professor Nestle was open to the evidence presented — in this case regarding the relative yield between conventional and organic production. In the end, though, she threw up her hands at the conflicting research:

What impresses me about research on organic productivity is that its interpretation can be predicted by who is doing the interpreting.  I’ve seen, and review in my book, What to Eat, plenty of research demonstrating that organics are only slightly less productive than industrial agriculture and at much lower cost to soil and the environment.

We think this is where most people will end up. The problem is that it is relatively easy to do research that will show organic production to be competitive. This is because as long as organic has only a tiny share of production, producers have the option to grow organic in a location that is optimized for organic production.

The yields in these optimized locations can sometimes be competitive with those of conventional production. This has, though, almost no relationship to the question of whether if all production was converted to organic, would the yields be competitive.

Here at the Pundit, we are in touch with too many growers who have tried to grow organic to have many doubts. Most of these growers were very motivated, they tried to grow organic because they thought they could make money doing so. Yet the results are in... demand or not, East Coast organic apples will remain a rarity.

This issue is not a trivial one. Professor Nestle highlights that organic growing operates at “much lower cost to soil and the environment.” This is controversial. Organic growing utilizes all kinds of substances, and it is not easy to establish that utilizing, say, copper, is more beneficial for than environment than synthetic substances.

Even if true, however, the environmental benefit would depend crucially on the ability to use the same area of land to raise food. If we were compelled to, say, destroy the rain forest to increase acreage for food production, it would be very difficult to make the case that the net benefit of organic production was beneficial to the environment.

One area we find ourselves in sympathy with Professor Nestle is in her critique of the interactions between the organic community and the US government:

The USDA has long been an uncomfortable host for The National Organic Program. This agency’s job is to support industrial agriculture, and organics are indeed small in comparison.

But organic production is an explicit critique of industrial agricultural systems. Organics get higher prices.  And their sales are increasing.

No wonder USDA and representatives of industrial systems don’t like organics much and do everything they can to find fault with it.

Sure there are faults to find:

  • Weak and inadequately enforced standards
  • Endless pressure to add industrial chemicals to the approved list and further weaken the standards
  •  Expenses that few small farmers can afford
  • Inadequate protection from contamination with genetically modified crops
  • Suspicions about the equivalency of standards for imported organic foods
  • Bad apples who make things difficult for farmers who are doing things right

USDA ought to be doing all it can to work with organic producers to fix these problems.  To its credit, USDA recruited undersecretary Kathleen Merrigan to try.

We think most at USDA would dispute her characterization of the agency, saying instead that its responsibility is to promote US agriculture, and since 99% of that agriculture is not organic, it should mostly promote the agriculture we actually have, rather than the agriculture organic advocates might wish we had.

That doesn’t mean that USDA doesn’t want to help organic farmers. As Professor Nestle notes, there is now an “agreement between the U.S. and the E.U. to recognize each other’s organic standards, thereby opening the European market to American organics. USDA reports that the organic industry is delighted with the opportunity for new market possibilities.”

Although Professor Nestle sees a problem in USDA hosting the program, we would say the organic community made a deal they will find difficult to live with in asking the government — any agency of the government — to manage this effort.

Obviously, organic advocates could have gone out and registered a trademark and could have kept organic standards pure and enforcement rigorous.

The minute the government is involved, though, politics is involved. And in politics, the organic community faces a difficult state of affairs. As long as organic is a tiny and insignificant industry, it could probably make its own rules without much interference. After all, who would care enough to fight?

Yet as organic grows, it becomes a more significant business opportunity and then General Mills, Kraft, etc., become more interested. As they become more interested, they also will look to see that the rules established meet their needs.

Now, obviously, there is no upside for them in tarnishing the organic “brand” — after all they want to profit from the brand. Still, over time, if organic becomes a substantial part of the food business, since organic growers are not the most powerful political force in the food industry, we will see the standards and enforcement change in a way that will benefit larger, more politically powerful companies.

This is not a function of USDA misbehaving. It is a function of tying one’s hopes to political forces. Of course, we don’t have to lecture to Professor Nestle on that subject… she is the author of Food Politics: How the Food Industry Influences Nutrition and Health.

Support Grows For Vitamin D Enhanced Mushroom

Our piece — Vitamin D Enhancement In Mushrooms: Can This Be A Portal For The Produce Department Into Functional Foods? Professor Neal Hooker Of St. Joseph’s University Unveils The Latest Research At New York Produce Show And Conference — dealt with the mushroom industry’s efforts to produce and market mushrooms that are rich in Vitamin D. Such efforts may become very important. Produce is generally a poor source of Vitamin D, and a lot of recent work is pointing to the importance of Vitamin D.

There seems to be a new consensus gathering on its importance, as is explained in this piece titled, Sunshine, Vitamin D, and Death by Scientific Consensus:

The traditional “Top Ten Breakthroughs of the Decade” lists have been appearing in science-related publications. One breakthrough, however, is conspicuously missing from every list I’ve seen so far. I’m talking about the new understanding of the role and proper dosage of the sunshine vitamin D.

The “scientific consensus” that has held sway for four decades regarding both exposure to the sun and vitamin D has collapsed. What has emerged in place of the old “settled science” is the knowledge that most people in America are seriously vitamin D deficient or insufficient. The same is true for Canada and Europe, and the implications are staggering.

Simply put, unless you are one of the few people with optimal serum D levels, such as lifeguards and roofers in South Florida, you can cut your risks from most major diseases by 50 to 80 percent. All you have to do is get enough D. It also means we can significantly reduce both health care costs and the staggering national deficit by taking a few simple steps.

We tend to think that produce is always the healthy choice. In the case of Vitamin D, it is not, unless we find ways to make it so. Props go to the mushroom industry for being innovators in this area.

Pundit’s Mailbag — Truman, Eisenhower And Leadership: The Distinction Between Business And Politics

Our piece, Business Strategies Don’t Often Translate In Politics, which dealt with an article we wrote for The Weekly Standard titled, Ron Paul — and the ‘Pink Slip’, brought this note:

Business and politics are not the same. It is a mistake to assume that a successful business executive and/or entrepreneur would make a good political leader.  While governments could learn important lessons from business, especially in the fields of efficiency, innovation and fiscal restraint, the mission of business and government remain vastly different.

The mission of business is profit and increasing the value of the enterprise.  The mission of government is to serve and protect the people whom they lead, which includes reasonable oversight and regulation of commerce both domestic and international as well as maintaining a standing army and protecting the constitution.  Government's aim is to increase the value of life and opportunity for all its citizens.

That is often in opposition to the goals of business.

— Richard Kaiser
The Richard Kaiser Co. Inc.
Salinas, California

Richard has been kind enough to contribute many letters to the Pundit including these:

Pundit’s Mailbag — Population Inured By Recalls

Pundit’s Mailbag — Should PMA And United Merge?

Pundit Mailbag: Consumer-Focused

Pundit’s Mailbag — The Role Of Produce Traders

We appreciate Richard’s insight today. It is indeed unclear that being a good business leader assures that one would be a good political leader, though we suspect that would apply to almost any line of work.

Richard Neustadt, a renowned political scientist who, among other things, was a founding faculty member at Harvard’s John F. Kennedy School of Government, wrote a famous book titled, Presidential Power. In the introduction, he told a story of President Truman reflecting on the possibility that the Supreme Allied commander in World War II, Dwight D. Eisenhower, would become President:

In the early summer of 1952, before the heat of the campaign, President [Harry] Truman used to contemplate the problems of the general-become-President should [Dwight David] Eisenhower win the forthcoming election. "He'll sit here," Truman would remark (tapping his desk for emphasis), "and he'll say, 'Do this! Do that!' And nothing will happen. Poor Ike — it won't be a bit like the Army. He'll find it very frustrating." 

And indeed, when elected, he did find it frustrating:

Eisenhower evidently found it so. "In the face of the continuing dissidence and disunity, the President sometimes simply exploded with exasperation," wrote Robert Donovan in comment on the early months of Eisenhower's first term. "What was the use, he demanded to know, of his trying to lead the Republican Party ..... And this reaction was not limited to early months alone, or to his party only.

"The President still feels," an Eisenhower aide remarked to me in 1958, "that when he's decided something, that ought to be the end of it ... and when it bounces back undone or done wrong, he tends to react with shocked surprise."

Truman knew whereof he spoke. With "resignation" in the place of "shocked surprise," the aide's description would have fitted Truman. The former senator may have been less shocked than the former general, but he was no less subjected to that painful and repetitive experience: "Do this, do that, and nothing will happen."

Long before he came to talk of Eisenhower he had put his own experience in other words: "I sit here all day trying to persuade people to do the things they ought to have sense enough to do without my persuading them.... That's all the powers of the President amount to."

In fact, Neustadt came down to saying that the power of the Presidency was weak; that it was mostly the power to persuade:

In these words of a President, spoken on the job, one finds the essence of the problem now before us: "powers" are no guarantee of power; clerkship is no guarantee of leadership. The President of the United States has an extraordinary range of formal powers, of authority in statute law and in the Constitution.

Here is testimony that despite his "powers" he does not obtain results by giving orders — or not, at any rate, merely by giving orders. He also has extraordinary status, ex officio, according to the customs of our government and politics. Here is testimony that despite his status he does not get action without argument. Presidential power is the power to persuade....

So generals, accustomed to people saying “Yes, Sir” and mindful of court martial for insubordination, are going to experience frustration when things don’t happen with the same abandon they do when a general gives orders.

Of course CEOs learn quickly that giving orders may be a way to achieve certain things, but not to achieve everything.  And truth be told, generals know that as well.

Orders work best if subordinates have given their superior not merely their obedience but their hearts, fighting with passion, in the army, and on the battlefields of business.

In government, progress is difficult. Partly this is because one deals with a web of institutions that are not subordinates. Neutadt explained:

The Constitutional Convention of 1787 is supposed to have created a government of ‘separated powers.’ It did nothing of the sort. Rather, it created a government of separated institutions sharing powers. "I am part of the legislative process," Eisenhower often said in 1959 as a reminder of his veto. Congress, the dispenser of authority and funds, is no less part of the administrative process.

Federalism adds another set of separated institutions. The Bill of Rights adds others. Many public purposes can only be achieved by voluntary acts of private institutions; the press, for one, in Douglass Cater's phrase, is a ‘fourth branch of government.’ And with the coming of alliances abroad, the separate institutions of a London, or a Bonn, share in the making of American public policy.”

So to a general, the frustrations — and Eisenhower knew them well — of negotiating with an ally, as he did with General DeGaulle or Lord Mountbattan and even Stalin, is more akin to governing than giving orders to soldiers.  And, it is not really a secret that though John Pershing, Douglas McArthur and George Marshall may have been soldiers, they were scarcely meekly compliant ones.

In business, telling one’s employees what to do is one thing, but vendors, customers, regulators, investors, lenders, etc., are not likely to be so supine.

Truth is that leadership is complex. Even if you think that business experience is relevant and important in a President, the kind of business experience that Mitt Romney, for example, had — primarily as an investor in businesses — is quite different from someone who sweated out a payroll.

In fact, the answer may be that stereotypes of leadership — generals and businesspeople, etc. — don’t really deal with the subtleties that make some great leaders and some not. George F. Will has a column out titled, The Unknown Greatness of Ike, that focuses on a controversial plan to build a new memorial. The focus of the memorial, oddly, is Eisenhower as a boy. The approach was selected as a way of diminishing Eisenhower’s importance:

WashingtonPost cultural critic Philip Kennicott says the statue suggests Eisenhower “both innocent of and yet pregnant with whatever failings history ultimately attributes to his career.”

Failings? A memorial is not an exhaustive assessment; it is a celebration of a preponderance of greatness.

Kennicott praises Gehry’s project because it allows visitors “space to form their own assessment of Eisenhower’s legacy.” But memorials aren’t seminars; they’re reminders that a person esteemed by the nation lived and is worth learning more about.

Kennicott says Gehry’s project acknowledges that “few great men are absolutely great, without flaws and failings.” Good grief. If Ike, with all his defects, wasn’t great, cancel the memorial.

Kennicott celebrates the “relatively small representation of Eisenhower” because “there were other Eisenhowers right behind him, other men who could have done what he did, who would have risen to the occasion if they had been tapped.” How sweetly democratic. Greatness can be tapped hither and yon. But if greatness is so abundant and assured, it is hardly greatness, so cancel all memorials.

Whatever makes a great President — of a country, or a company — it is not something easily derived from their resumes.

Many thanks to Richard Kaiser for weighing in on this important topic.

Pundit’s Mailbag —  Are Consumers Entitled To Know If Organic Or Transitional Product Is Sold As Conventional?

Although recently our interview with Dr. Steve Savage — which we ran under the title Organics, Crop Yields And Feeding The World — has been attracting all the attention when it comes to organics, we had previously run a piece on organic produce that attracted its own response. Our article, As Organic Produce Grows Beyond Local And National Borders, Will Government Step In To Set Definitions And Change Certifications? brought a letter from this frequent correspondent:

Reading your article on Organic reminded me that we still have a question here in the United States that has never really been addressed since the spinach crisis of 2006. When a product is farmed organically but sold as conventional only because the three-year certification cycle has not been fulfilled, should a product be considered organic because of the calendar or because of the way it is being farmed?

— Eric Schwartz
President and Chief Executive Officer
Patterson Vegetable Company
Patterson, California

Eric has contributed many pieces to the Pundit including these:

Pundit’s Pulse Of The Industry: Dole Vegetables’ Eric Schwartz

Pundit’s Mailbag — How About Subsidy Money For GTIN Conversion?

Pundit’s Mailbag — Dole’s Schwartz Comments On Silent Buyers

Pundit’s Mailbag — More Questions About Leafy Greens Board

Pundit’s Mailbag — The Deadline Approaches

Pundit’s Mailbag — Organic Industry’s ‘Situational’ Standard

Single Step Award Winner — Eric Schwartz Of Dole Vegetables

Pundit’s Mailbag — PMA’s Opportunity To Learn From Friends And Foes

Pundit’s Mailbag — Lesson From Avocadogate: You Get What You Tolerate

Dole Hit With Another Recall

Dole’s Schwartz Sheds More Light On Recent Recall

Arizona Marketing Agreement One Step Closer To National Leafy Green Standard

Why The Secrecy On Inspection Agency Lab Results?

A Call To The Buying Community: Uniform Food Safety Standards Are Required

We always value Eric’s input and so appreciate this now as it gives us an opportunity to deal with an interesting issue. The rules regarding organic certification require that if the land was used for conventional production, there is a three-year waiting period following the switchover to organic techniques, after which the product can be marketed as organic.

The reason for the waiting period is that, understandably, someone interested in buying organically grown product would not be happy buying an apple, for example, on Tuesday from, say, a tree that had been sprayed synthetically on Monday  but was part of an orchard that had commenced organic techniques that morning. More broadly, the notion is that there are residues in the soil, etc.

We are not actually aware of any good evidence for why three years and not 30 months or 42 months or something else is the standard, but that is the number that was agreed to.

Technically during this three-year period the product, grown in accordance with organic standards but not yet certifiable as organic, could be marketed as “transitional.” Although there have been efforts to market product in this way, as we mentioned here, they are few and far between. It is hard enough to have two separate products — conventional and organic — with two separate price points. To market a third with a subtle distinction is just too hard. Not that growers would not like to. After all, for three years this transitional rule means that growers will incur the costs and lower yields of organic without getting the price premium.

Still, that is the situation, and so unable to market the product as organic and there being no market for transitional, most of the product gets sold as conventional.

Eric is raising the question of whether this, in and of itself, isn’t actually a form of fraud perpetrated on consumers. The assumption had always been that, though organic consumers wanted that kind of product, conventional consumers didn’t care. In fact, some retailers, looking to reduce the SKU count, only carry organic on low volume items on the assumption that consumers are just as happy to buy organic as conventional.

We have never seen a survey that attested to this, yet with concerns over food safety, this may not be true for some consumers. We have received a few letters from conventional farmers saying that they actively preferred not to eat organic. The gist was that organic pesticides and fungicides are less effective than synthetic options, so they felt that more had to be applied and this could lead to more residues.

Of course, the problem is that although product is certified to be organic, nobody certifies product to be conventional. So, other than the fact that it has to be legal, there is no violation in marketing transitional product as conventional because there is no standard to violate. The question Eric is really asking is ought there to be such a standard?

We suppose opinions will differ, but we tend to think we have enough standards to worry about without creating another one.

Many thanks to Eric Schwartz of Patterson Vegetable Company for prodding us to think through this intriguing subject.

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