Regulatory restrictions are making food supply chain disruptions worse
The holiday season is upon us, and supply chain disruptions have become dinner table conversation. Higher food prices abound as beef, pork and chicken prices are up 26 percent, 19 percent and 15 percent compared to pre-pandemic levels. Why the price spike? As the pandemic drags on, labor shortages and jammed up ports are a focal point of media coverage, but reports have largely overlooked the impact of cumbersome, overlapping regulatory restrictions on food supply chain disruptions.
The objectives of food law are often clear, but the outcome of these laws is often muddled. Regulators want to ensure that food is safe to eat, that the labor force has safe working conditions, that production expenses account for long-term environmental costs and that animal welfare standards are maintained. Regulations also seek to ensure food manufacturers are not exercising market power or engaging in other unethical business practices. These stated goals led to the Food Safety and Modernization Act (FSMA) of 2011. Touted as "the most significant update of U.S. food safety laws since adoption of the U.S. Federal Food, Drug, and Cosmetic Act of 1938," FSMA prescribed a hefty framework to thwart food fraud, prevent foodborne disease and improve sanitary conditions in food and agriculture. Proponents of FSMA offered solutions to food system shocks by providing a comprehensive contingency plan complete with preventative measures.
Although well-intended, food regulations can restrict the resiliency of U.S. food systems in three ways:
1) When regulators implement new restrictions without eliminating prior, archaic restrictions, regulatory burden can increase the prices consumers pay at the grocery store and restrict product availability for lower-income households.
At a minimum, the cost of a regulation is the compliance cost associated with reading, understanding, and abiding by the restriction. This is especially relevant for the food and agricultural economy, as the poorest quintile of U.S. households spend more than a quarter of their income on food.
Indeed, our research indicates that regulatory restrictions across food systems have increased 300 percent over the past half-century, with much of this growth occurring in the wake of FSMA.
For one ounce of beef protein to be produced in the United States, more than 200,000 regulatory restrictions directly or indirectly influence on-farm production, processing, wholesale and retail sales. By comparison, fewer than 50,000 restrictions impacted the same system in 1970.
2) Regulatory hurdles restrict flexibility between interlinked supply chains. When retail shell egg prices sky-rocketed by 141 percent in 2020, breaking stock eggs - which are primarily used in foodservice and restaurants - plummeted below the cost of bottled water. Even though both kinds of eggs can often be raised within the same production system, it wasn't until the U.S. Food and Drug Administration issued temporary exemptions from certain overlapping food safety standards that the market prices could return to their pre-pandemic ratio. Nimble supply chains require a stronger focus on outcome, rather than process.
3) Regulatory burdens can prevent economic dynamism and entrepreneurial growth for U.S. companies. The existing patchwork approach to U.S. food regulation creates overlapping and onerous guidelines for industry members across the food supply chain.
Given the interconnectivity of modern-day food supply chains, differences in state regimes can create additional hurdles for interstate commerce. State-level supply chain restrictions have been linked to stalled growth in a myriad of food and beverage businesses ranging from breweries to aquaculture production.
Although most food regulations are implemented at the national level, state governments vary dramatically in the number of additional protein supply chain regulations. Our research indicates that the total number of state-level regulatory restrictions associated with animal product ion range from 715 in North Dakota to 18,010 in Oregon.
As food supply chains become increasingly national and international, regulatory policy needs to be modernized to focus on goals rather than processes, to encourage innovation and to foster transparency. An important step toward increased food system resiliency is to assess overlapping regulatory restrictions constraining producers, processors, distributors, and retailers. Regulatory policy should concentrate on individual supply chains to craft goal-driven policies rather than process-oriented policies. Instead of regulating how a product is made or what must or must not be added to a product, regulators should focus on the policy's stated objectives.
Policies must also encourage innovation. Just as technological gains are synonymous with innovation in agriculture, agricultural and food regulatory enforcement can benefit from technological advancements.
For example, meat-processing facilities must be inspected by certified governmental officials, but concerns over inspector travel and safety induced a lack of meat inspectors, increasing production costs. Virtual inspections, similar to those piloted in Iceland, might provide additional flexibility and resiliency.
Food regulatory policy must also consider the importance of cybersecurity for safe communication in globalized marketplaces. With tens of thousands of regulatory restrictions influencing producer behavior, the need for information sharing between each node of the supply chain means that producers must devote significant time, energy, and other resources to understanding their legal constraints. If the U.S. economy is serious about supply chain resiliency, regulatory reform must be a part of the discussion.
Trey Malone is an agricultural economist and Elton R. Smith endowed fellow in the Department of Agricultural, Food, and Resource Economics at Michigan State University. Follow Malone on Twitter: @DrTreyMalone
Aaron Staples is an agricultural economist in the Department of Agricultural, Food, and Resource Economics at Michigan State University. Follow Staples on Twitter: @AaronJStaples
Malone and Staples are co-authors on the recent study "Regulatory Restrictions Across U.S. Protein Supply Chains."
