Although the likelihood and consequence of disease outbreak will be reduced with Hazard Analysis of Critical Control Points (HACCP), several questions about the costs and benefits to small firms remain unanswered. A major concern by industry participants is to quantify HACCP costs and benefits that are specific to small firm. There are substantial benefits from HACCP to society as a whole, but specific firm level benefit are yet to be quantified especially for small firms. This paper therefore quantifies HACCP costs and evaluates meaningful levels of cost savings with HACCP implementation, for small firms, using efficiency analysis. Such savings may provide firm specific benefits that will enable small firms to compensate high HACCP implementation expenses.

Analysis in this paper begins with cost estimates of HACCP safety regulation for different firm categories and sizes, and follows with concurrent cost cutting incentives, both from a view of efficiency with respect to economies of size, technical efficiency, and parametric variation of biased technical change. These approaches are adopted in this study because of the focus of analyzing cost cutting incentives. Economies of size and biased technical change are derived from the estimated flexible cost functions. Two efficiency tests are used to compare the performance between firms before and after HACCP implementation and firms with and without HACCP systems. Allocative efficiency maps the marginal cost set and the price set, technical efficiency maps the output and input sets, and economies of size efficiency maps the marginal cost and output set. This paper uses economies of size efficiency and technical efficiency because the literature and survey data reveals that prices may not serve as incentives to compensate small firms for their HACCP expenses. This paper uses both efficiency measures because efficiency results vary widely with the method used.

To run the empirical models for this study, data on input and output prices and quantities for all production activities are needed. Secondary data on HACCP were not available for the detailed analysis required for this study. Therefore, a field survey had to be conducted to collect specific HACCP data. Data were collected for all HACCP input variables and other firm data relating to labor, material, and carcass and live animals purchases. A mail survey approach was chosen due to cost considerations. The population is meat processors and packers in the United States. A systematic random sampling technique was used to select a sample of 1050 firms from a population of 13,572 firms across the U.S. provided by the American Association of Meat Processors. The questionnaire was designed to provide data to estimate HACCP cost and economic efficiency. The questionnaire was pre-tested three times to adjust the clarity of the questions. The questionnaire had three sections: general business characteristics, total production expenses, and HACCP performance and expenses.

The response rate from the survey and survey results reveal that there is limited scope of HACCP implementation in the meat industry. HACCP cost estimates reported by survey respondents were relatively higher for smaller firms as compared to their larger counterparts. Small firms incur an average of 25 cents per pound of processed products. The methodology developed in this paper was tested using the primary data collected from meat processing and packing firms in the industry. Cost structure analyses indicate the cost functions were non-homothetic. Estimation in this research therefore incorporates the interaction term of output and input prices (lnylnw_i), output (lny), and the quadratic interaction term of output (lnylny) into the model. This is especially important because the test for non-homotheticity (Ho: Coefficient of lnylnw_i = 0 _i ) requires output in the cost function specification. Homotheticity tests are important because scale and size economies are the partial derivatives of the cost function with respect to output quantities. This implies that technical change is due to both the Hicksian and scale effect.

Economies of size efficiency analysis of primary data collected across the U.S. indicate that meat and poultry processing firms enjoy lower marginal costs with HACCP systems as opposed to their marginal cost prior to HACCP implementation and firms without HACCP systems are less cost efficient than firms with HACCP systems. Using a Ray homothetic function and adjusted ordinary least square procedure, firms with HACCP systems have greater technical efficiency than firms without HACCP systems. This paper confirms the proposition that HACCP can be used as an effective management tool to increase efficiency in the meat industry.

Analysis of biased technical change suggest reasons why small firms may be more efficient with HACCP systems. These results indicate that HACCP can improve the overall efficiency of the meat industry by efficient reallocation of labor use and carcass purchases. Small firms that may not have output price incentives or economies of scale incentives can enjoy cost cutting incentives with HACCP systems. HACCP will be economically beneficial to small and large firms.

Though (HACCP) is intended to increase the safety of meat and poultry products by decreasing harmful bacteria levels, it also has the potential as a quality management tool to reduce production cost and improve the efficiency of the industry.

Key Words: HACCP Costs, Efficiency, Meat Industry, Biased Technical Change, Economies of Size.

¹The authors are research assistant and associate Professor at the University of Illinois, Urbana-Champaign.

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