Background last update:6 Aug 2012

Feed scares; how to prepare for the unexpected?

The feed sector has gone through some serious scares lately; from dioxin to melamine and from salmonella to aflatoxins. These scares not only cost money, they also damage the image of the sector. What can be done to prevent it? Feed Tech has put this question to Wilco de Haan, Director Liability at Marsh, eminent insurance broker and risk management consultant. By Emmy Koeleman

Companies are often aware of the risks. However, they do not always see them coming.
Let's briefly go back to March 17, 2007; Menu Foods, a major manufacturer of dog and cat food in North America recalls 60 million containers of wet food after it received reports of pets suffering kidney failure. Almost a year after the event the facts have come to the surface, wheat gluten contaminated with melamine from China ended up in the pet food and caused disastrous effects. Thousands of pets died, US$55 million dollars in damage, class action lawsuits, lost clients and a ruined image. In Europe, we faced several serious dioxin crises in 2006, after the cancer-causing chemical was detected in pig and poultry feed used by hundreds of farms.
 A similar crisis happened in Belgium in 1999, in which the industry lost millions of Euro, either through quarantine of 200 Belgian farms, or through the loss of their export markets after some countries imposed bans. It turned out that two filters at Tessenderlo Chemicals were defective, resulting in untreated hydrochloric acid being delivered to its subsidiary, PB Gelatins. PB Gelatins in turn, supplied animal feed producers with dioxin contaminated ingredients. These two examples of feed scares have different backgrounds and consequences. They do however have one important thing in common, it all started with only one contaminated ingredient.
Food must be safe
A good risk management plan combined with a good insurance can help to prevent or minimise the damage after feed contamination or product recall, explains Wilco de Haan from Marsh. Marsh is part of MMC (Marsh & McLennon Companies) and is expert in providing advice and solutions in risk strategy and human capital. The company helps its clients to identify, plan for and respond to critical business issues and risks. This is important because risks are present in all types of business. Newspapers and websites often publish advertisements that certain food products, toys, electrics, clothing and mattresses are recalled.

Empty shelves in a US supermarket. The recalled pet food by Menu Foods has cost the company millions of dollars.

“However, not all risks have the same impact,” says de Haan. Feed companies seem to require some extra attention in this. This is because the animal feed is part of the food chain, which is is a long and complicated one, marked with many different suppliers and buyers from around the world. This may sometimes lead to miscommunication with different approaches and thoughts about quality and safety issues. Secondly, because the end product is food for humans there is inevitably more scrutiny as it is such a sensitive area. Animal feed that is used for the production of animal products therefore need to be of top quality and absolutely safe. In addition, legislation concerning the production of feed is getting stricter (for example lower maximum levels for PCBs and mycotoxins). Also supermarkets, due to their oligopolistic market position, are major stakeholders in this market and sometimes demand certain quality and certifications for  animal feed.
Contamination insurance
Because the rules are getting stricter and the potential implications resulting from a major feed scare become bigger, feed companies are increasingly looking for ways to offset their risk. “Besides a property damage and business interruption insurance, a public and product liability insurance, a feed company can nowadays buy coverage for all the costs associated with product contamination”, explains de Haan. Such a safety net allows the company to recover defined costs involved in the recall, as well as insuring that the company has the resources to get outside assistance.
A special product contamination insurance is already quite common in the human food sector. “However, feed companies sometimes don't need or want such an insurance,” says de Haan. Many potential risks in the feed industry are already minimised by simple quality and hygiene procedures (on farm hygiene measures and joint programmes such as GMP+, HACCP and ISO). If a feed company agreed that ingredients need to be GMP+ certified, and it turns out not to be the case, the company can claim the potential damage from the supplier. These measures are all implemented to prevent risks and claims from other companies in the feed chain. This is the reason why an increased number of feed companies have adopted GMP+ for example and more local initiatives pop up regarding food and feed quality.
Risk inventory
Quality and hygiene programmes are very important; however there are still scenarios where these programmes and measures are not adequate. Menu Foods could not conceivably foresee that buying the contaminated wheat gluten from China would have such dramatic consequences. De Haan: “This is where we as insurance broker and risk management consultant come in. By carrying out an extensive risk inventory, we gain a better insight regarding what the specific risks are and how these can be prevented”. A risk management consultant tries to compile a good risk inventory by asking the following questions:

- What are the current quality measures at company level?
- Which specific risks is the primary producer exposed to?
- Where are the measurement points within the feed/ food chain?
- What are the tracking and tracing methods and quality programmes that are currently in use?
- How much risk are you able and willing to take?
- What are the quality requirements that you have to deal with (feed safety, food safety?)
- What are the certifications, norms and standards?
- How are these managed and controlled?
- What is the legal context in which the liability needs to be covered?
- What are the current financial solutions? Any more requirements? Etc.”
The risk matrix
The above questions give a good insight into the possible gaps and variations (non-compliance issues) regarding existing certifications and norms in the sector (GMP+, ISO, HACPP, BRC). “After that, we hold interviews with the key-stakeholders of the company (double check for possible gaps),” explains de Haan. A third step in the risk inventory includes the risk matrix. The different risks will be labelled and then plotted as to whether they are perceived as a high or low impact (see figure 1). This makes it easier to define the priorities and an action list. The last step is risk grading, a review for existing processes (e.g. purchasing, quality assurance, etc.). “Having insight into the risks and insurance covers in place, does not automatically mean that you can lay back and relax,” de Haan continues. It remains difficult to predict whether all potential risks are covered and if they will prove sufficient if an incident were to occur.
More claims expected
More claims, contaminations and recalls can be expected in the future, which makes adequate risk management and (if desired) a product  contamination insurance more important for feed companies, according to de Haan. The increased number of claims is the result of better analytical methods (for example dioxins, PCB), more stringent legislation (lower maximum tolerated levels in feed), increased awareness among consumers and increased scrutiny from supermarkets. In addition, the speed that information proliferates across the globe due to modern communication technology ensures that any negative publicity, whether true or not, will expound the problem. Increased knowledge on the effect of certain toxins for human and animal health also guarantees that any problems become front page news.
Good communication
In the case of imported contaminated ingredients, such as the wheat gluten from China (pet food) or the contaminated animal fat (dioxin scare), the feed company that brought in the contamination always has to recoup the losses from the previous link in the chain. “These risks, when they result in third party damage (bodily injury or material damage) can be covered by public and product liability insurance, but it shows that good communication and clear agreements between companies are of utmost importance,” according to de Haan. Does the supplier uses the same quality norms as your company? Which agreements are put on paper in the contract? Does your supplier have adequate insurance? These are important factors that need to be taken into account when buying ingredients (especially) from an unknown supplier.
Quality programmes, hygiene and an adequate risk management are important prerequisites to produce safe feed. However, contamination of feedstuffs may sometimes lead to recalls. Feed companies can protect themselves against the extra costs involved in such as recall through a special product contamination insurance. “However, insurance is often tailormade and it largely depends on the type of business, production volume, region, speciality of cover and values involved,” concludes de Haan.
Source: Feed Tech Volume 12 No. 2

Editor AllAboutFeed

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