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Lies, Damned Lies And Statistics

Our piece exploring the subject Is Salinas Getting a Bum Rap On Food Safety raised the question of whether the math and methodology used to study foodborne illness outbreaks biases the results against larger producers — such as the Salinas Valley. You can read the piece right here.

We got a lot of feedback on that, including several requests that we lay out the math more exactly. So here it goes:

The key is the FDA’s explanation in its letter to California Lettuce Growers:

FDA is aware of 18 outbreaks of foodborne illness since 1995 caused by Escherichia coli O157:H7 for which fresh or fresh-cut lettuce was implicated as the outbreak vehicle. In one additional case, fresh-cut spinach was implicated. These 19 outbreaks account for approximately 409 reported cases of illness and two deaths. Although tracebacks to growers were not completed in all 19 outbreak investigations, completed traceback investigations of eight of the outbreaks associated with lettuce and spinach, including the most recent lettuce outbreak in Minnesota, were traced back to Salinas, California.

Putting the current outbreak aside, the FDA identified 19 total outbreaks comprising 409 illnesses and two deaths — a total of 411 health incidents. The 411 health incidents divided by the 19 outbreaks means an average of 21.64 people were reported ill or died on each outbreak.

Now, Susan Pollack, an economist at the USDA Economic Research Service in Washington, D.C., shared with us some production statistics for 2005. The gist of the numbers is that California accounts for about 75% of all production of lettuce and spinach in the United States.

It is probably a bit lower than that as many producing states, such as New York, produce such a small quantity of lettuce that USDA doesn’t include their production in the data.

So, if the average California-based outbreak produces illness that makes the FDA aware of only 21.64 health incidents, we can say that a producer elsewhere who might equal 5% of California production will result in only a little more than 1 person being known as getting sick or dying. (With the exception of Arizona, there is no state that equals even 5% of California production on these items.)

These levels of illness are untraceable because you can’t survey people to find out what they ate and find out any statistically valid information on a survey of one or two people.

So the FDA is blocking the sale of spinach from three counties and sending letters to California growers based on a statistical chimera. There is no legitimate reason to believe these fields are currently less safe than any other fields in America. In effect, the FDA is punishing producers in a growing area for being big, not for being bad.

What is really going on here is a triumph of modern civilization. In the old days, people all over America got killed by their horses every single day. Either they were thrown or they were kicked. It was accepted as part of the common struggles and misfortunes of life. Most deaths never even made it into the newspapers.

Flying on a jumbo jet is infinitely safer than riding a horse, but when one jet crashes it kills 400 people at a shot and appears on Internet news reports instantly and prominently.

Our age is one of low incidence of tragedy but high intensity of tragedy because ours is an age of scale.

So people always got food poisoning and always died. In fact, they both got sick and died far more frequently than they do today. But we are now aware of more outbreaks partly as a result of improved detection but also as a result of consolidation of production allowing more effective tracking.

Here is the irony: It is large-scale production and processing that provides both the technological and capital base needed to reduce foodborne illness and also provides the scale that makes detection of foodborne illness more likely.

So as the food supply gets safer, it appears more dangerous. The FDA, which could serve a useful purpose in communicating this phenomenon, has given no indication that it realizes the phenomenon even exists.

New York’s Ban On Trans Fat
Example Of Petty Tyranny

The New York City government would like to ban the use of trans fat in all the restaurants in all five boroughs of New York City.

It is a mistake on many levels.

The typical argument against the proposal is health-based. Elizabeth M. Whelan of the American Council on Science and Health wrote a column that explained:

Yes, high levels of dietary trans fats, derived primarily from partially hydrogenated vegetable oils, can raise levels of LDL, the so-called “bad” cholesterol. But TFAs are only one of several dietary factors that affect blood cholesterol levels.

More important, cholesterol is only one of several factors that may influence the risk of heart disease. Cigarette smoking, high blood pressure, diabetes and obesity all contribute far more to heart disease than any specific dietary ingredient.

Any practicing physician who has treated patients with elevated cholesterol levels will tell you that even the strictest low-fat diets often result only in modest cholesterol reduction. So how could we expect significant effects from banishing just one type of fat — one that represents only 2% of our total daily calorie intake, and which doesn’t contribute more calories than other types of fat?

And she also points out that you can’t oppose a type of food on health grounds without knowing the risks of what might take its place. As she explains:

To truly appreciate the hysteria here, consider: What will replace the allegedly malicious TFAs?

In the late 1980s, the “food police” at the Ralph Nader-inspired Center for Science in the Public Interest fomented a frenzy about the beef tallow that fast-food restaurants used to fry potatoes because it contains cholesterol-raising saturated fats — and demanded that they stop it. And what did CSPI recommend to take its place? Partially hydrogenated vegetable oils with TFAs. Now the wheel has turned and CSPI is shamelessly “outraged” over trans fats.

There is a long tradition in nutrition education that there is no such thing as a bad food. Everything is a matter of portion size and frequency and, in fact, if one is in good health with good cholesterol numbers, there is no science indicating that occasionally consuming some trans fat will do anything to your life expectancy.

Now all this is not to say that I think we should all eat trans fat. There are many people with specific health conditions, such as elevated cholesterol, for which it is not advised.

There are many food vendors who now use “Trans Fat Free” as a marketing tool. Wendy’s, for example, has made a point of getting rid of trans fat in most of its products.

I think it is fine if people want to buy these products. But the idea of singling out this one health-related issue and banning it is bizarre. Wendy’s may ban trans fat, but they are probably the biggest marketer in America of late-night eating. And banning late-night eating would probably do a lot more for the health of Americans than does banning trans fat.

But the whole move to ban trans fat is symptomatic of a move in society that is very dangerous. Originally public health restrictions were imposed for “public” reasons; they involved communicable diseases, and actions were taken to prevent the spread of such diseases. Even restrictions on alcohol were addressing a public problem such as the effect alcohol had on mobs of urban young men during industrialization.

But trans fat is tasty. The New York Post did a little anecdotal taste test here. If people want to take the risk of eating it because they prefer it on their french fries, who are we to stop them?

This notion that city councils and other units of government are there to be everyone’s nanny ordering everyone around is a kind of petty tyranny.

Our society is built on the idea of individuals making decisions for themselves… and taking responsibility for the consequences of those decisions.

If we start making these very minor decisions for the people, citizens will get out of practice in making decisions. Soon enough, we will turn around and find that the ability to make big decisions has atrophied, and democracy as we know it will be impossible.

Is Whole Foods’ Stock Worth The Price?

Mark Hulbert, who won his fame by holding financial newsletters accountable for their performance, wrote an interesting piece on the stock prospects for Whole Foods. He noted an anomaly in that this rapidly growing, high P/E multiple stock is eschewed by most of the well known growth-oriented investor newsletters he monitors but is praised by several value-oriented newsletters.

The growth newsletter editors are scared off by the stock’s high price, but the value editors speak differently:

“…in a comment that is typical of many value-oriented advisors, Motley Fool Stock Advisor co-editor David Gardner had this to say when recommending the stock: “I take a very long view of my (recommended) companies. I don’t make “20% guesses” as to whether a stock’s next 20% move is up or down. I simply look for the best companies in America and plan to hold them for the long term. I don’t mind paying up now for a stock that I believe will continue to deliver big gains over the coming years.”

I know and respect Dave Gardner. He is a very smart guy, and he and his brother actually gave me a position during the early years of The Motley Fool as the “Media and Entertainment Stock Analyst”, and I wrote a chapter of a book for The Motley Fool that was never published — though they paid me in full. So he is a good guy in my book.

But I think he is mistaken on this matter. The problem is this: Whole Foods trades now with a trailing P/E, or price earnings ratio, of over 50. It does so because it is perceived as having enormous growth potential.

One risk, of course, is that it may not realize that growth. In this case it would be worth much less. This is a very real risk because as Whole Foods goes from a niche player to a major player, one can predict it will attract new competitors.

But even if it obtains its growth targets, as the company grows, its prospects are likely to become more limited. So P/E compression will likely occur. This means that the company could have double the earnings it does now, meaning it grew substantially, but the stock’s P/E ratio could drop in half to reflect the company’s slower growth prospects off this much larger base.

Wal-Mart, for example, currently trades at a P/E of around 18. Over the last five years, its average P/E was 24; over the last ten years, its P/E was almost 30. As the company has grown, it is harder and harder to maintain rapid growth, and the stock market awards a lower P/E ratio.

Warren Buffet, the famous investor, enjoys saying that in the short term the stock market is a voting machine but in the long term it is a weighing machine — which means that in the short term, the stock of Whole Foods may go up or down depending on opinion, but in the long run, its results would have to be not merely exceptional but super-duper extraordinarily exceptional to justify its P/E of over 50.

Spinach Crisis Summary Rewind V

With so much having been written in so short a time, thought it would be helpful to publish a sort of round-up of available material to help people understand the whole situation regarding spinach and this E. coli breakout:

The Perishable Pundit itself has dealt extensively with the subject in several major pieces. On September 15, 2006, we published Spinach Recall Reveals Serious Industry Problems, which addressed the implications of this crisis for the fresh-cut industry. You can read the piece here.

On September 18, 2006, we published Organic Dodges a Bullet, which deals with the implications of the outbreak for the future of organic farming. You can find this piece here. Also on September 18, 2006, we ran a piece called Ramifications and Reflections on the Spinach Recall, which provided our first 10-point analysis of the situation. You can read it here.

September 19, 2006, we asked Is FDA’s Concern Now an Obsession? — a piece in which we assessed whether a national recommendation to not eat spinach made any sense. You can review this here.

On September 20, 2006, we noted 10 Peculiarities about the E. coli Outbreak and reviewed why certain aspects of the situation are unlike past food-safety challenges and other unanswered questions regarding the outbreak. Read this one right here. Also on September 20, 2006, we did our third 10-point list, calling this one “Spinach Recall Begs for Solutions”, where we reviewed how the trade can deal with this issue for the future, including looking at the meat industry, the prospect of universal testing and the use of RFID and GTIN. You can read all this here.

On September 21, 2006, we asked Is FDA Causing Long-term Damage? Here we posed the question of whether punishing the innocent and the guilty alike doesn’t reduce incentives to invest in food safety. You can read this piece right here.

The September 25, 2006 edition of the Pundit includes our fourth 10-point list entitled Though Not ‘All-Clear’, Consumers Can Eat Spinach Again, which reviewed many issues facing the industry as spinach begins to reenter the market, including the FDA’s announcement, PMA consumer research, the behavior of industry association, battles over fresh-cuts and organics, the reintroduction of Salinas Valley production, the FDA’s capabilities, and more. You can read this piece here. Also on September 25, 2006, we reviewed The Role of Retailers And The Future Of Food Safety, which pointed out that buyers have an important role in insuring food safety. Catch this piece here.

Additionally, on September 25, 2006, we ran the Pundit’s Pulse Of The Industryin which a panel of retail pundits gave us insight into the way the spinach issue played in store and with consumers. You can read it here.

The Pundit on September 26, 2006, included an articled entitled The California Department of Health Services Owes People An Explanation in which the question was raised whether certain parties received preferential treatment in the current spinach/E. coli outbreak. Read it right here. Also on September 26, 2006, we did a piece questioning the efficacy of our trace-back systems. The piece was titled More Recalls Trickle In, and you can read it here.

On September 27, 2006, the Pundit analyzed the bad publicity that the Salinas Valley has received and asked Is Salinas Getting A Bum Rap On Food Safety? The piece can be read right here.

September 28, 2006, included a piece entitled Call For Stronger FDA that analyzed the demand of some in the food industry for beefing up the FDA and its budget within the context of the spinach/E. coli situation. You can read it here.

In addition, the Pundit has done several smaller pieces that touched on various aspects of this crisis. On September 18, 2006, we raised the issue of whether food safety outbreaks such as this raise long-term issues about the viability of cartoon character tie-ins in Who Has Marketing Fortitude? You can read about it here. Also on September 18, 2006, we dealt with the way some companies have little sense of decency when it comes to marketing their products in the midst of a crisis. You can read this one right here.

Additionally on September 18, 2006, our Pundit’s Mailbag focused on letters received by United President/CEO Tom Stenzel and incoming Chairman Emanuel Lazopoulos of Del Monte Fresh, which dealt with the confluence of United’s Board Meeting and the spinach crisis as well as issues of industry leadership. You can find this one here.

On September 19, 2006, we noted that there might be a Greenhouse Opportunity in all this. Read this here. Also on September 19, 2006, we noted that, though fruits and vegetables are healthy, fresh produce is not necessarily the best choice for those with a compromised immune system. The piece is called Marketing Nightmare and you can find it right here.

On September 21, 2006, we did a piece called Wal-Mart Deli/Bakery Has Crisis Of Its Own that draws a link between the difficulty of preventing a Salmonella outbreak at one store with the difficulty of preventing an E. coli outbreak on an industry-wide basis. You can read this piece here.

On September 25, 2006, the Pundit noted Another Oddity In Spinach Crisis and raised the question whether some or all of the product being marketed as conventional might not be organic. Read it right here. Also on September 25, 2006, we ran a Pundit’s Mailbag which dealt both with the utility of loyalty card programs and with the nature of large, multi-line fresh-cut packing facilities. You can read this one right here. Also we did a short piece on what change was actually necessary if consumers were to be reassured of the safety of spinach. Read it here.

On September 26, 2006, we discussed the issue of recalls and how insurance plays into that. You can read this here. Also had an unrelated piece on Wegmans that included a video clip on how consumer media is dealing with the reintroduction of spinach. You can catch it here.

Additionally on September 26, 2006, we ran a Pundit’s Mailbag exploring the causes of the outbreak. You can read this piece here.

September 27, 2006, we focused on a piece in the Washington Post that helps us in Putting Things In Perspective. How does the Spinach/E. coli outbreak relate to the total numbers that get sick and die each year from foodborne illness? You can read it right here.

On September 28, 2006, we published a terrific Pundit’s Mailbag exploring the frustration the buy side felt in dealing with the spinach/E. coli situation. Read it here.

Several additional pieces appear in the Perishable Pundit on September 29, 2006, and they will be incorporated into future iterations of this Spinach Crisis Summary.

In addition to our own work, there are many excellent sources of information out there that do not require payment, membership or registration. Three of the Pundit’s favorites:

The U.S. Food and Drug Administration has offered daily information on the crisis right here.

The Centers for Disease Control and Prevention deal with the outbreak here.

The Produce Marketing Association has maintained an excellent industry resource on the subject right here.

Please feel free to write or call if you are looking for specific information not included here. Note that many of the articles and websites have links to other resources.

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