The major concern of small businesses is that HACCP implementation and operating expenses may be high enough to cause them to shutdown for several reasons. First, higher costs may not be compensated with increased prices. Second, though increased safety is consumer driven, Executive Orders or Acts protect businesses against costly regulatory procedures. For example, Executive Order 12291 compels agencies (USDA, FDA, etc.) to use cost-benefit analysis as a component of decision making. The Regulatory Flexibility Act (P.L. 96-354) requires regulatory relief for small businesses where feasible. The FDA finds that regulating food safety with an HACCP program constitutes a major rule under both the Executive Order and the Regulatory Flexibility Act. Consequently, the majority of small firms in the industry may respond adversely in case of any negative ruling that threatens their existence.

This paper investigates the change in probability of incurring negative net profits after investment in HACCP implementation and operating expenses. This paper outlines a more practical approach to measure the risk of a stochastic variable when only one period of performance data is available and no prior knowledge is given about past performance.

This paper uses stochastic simulation and Poisson estimation to evaluate the probability with which HACCP expenses may cause firms to shutdown. Empirical findings from the stochastic simulation indicate a 17.75% probability of shutdown by small meat processing firms when considering all expenses. Analysis of the Poisson model indicates that HACCP operating and depreciation expenses contribute negligibly to the risk of shutdown.

Key words: HACCP, Shutdown risk, stochastic simulation, Poisson model.

¹The authors are research assistant and associate professor, director of Food and Agribusiness Management Program at the University of Illinois, Urbana-Champaign.

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