March, 2000

Fruits of Thought

Inspecting Inspectors

The inspectors who were arrested for accepting bribes on the Hunts point market have pleaded guilty, and Roger Viadero, the USDA Inspector General was perhaps a tad too upbeat as, speaking at the United Convention in Phoenix, he called for help from shippers to find other corrupt inspectors. He was confident and buoyant and looking every bit the FBI agent he once was.

Kathleen Merrigan, the Administrator at the USDA’s Agricultural Marketing Service (AMS), also spoke. In a more timid, almost wistful manner she acknowledged a shortage of resources that precludes doing the job correctly, but lamented at the unlikelihood of getting the kinds of funds that she sees as necessary. It seemed as if Merrigan saw the service as condemned to inadequacy and, the unspoken subtext, continued corruption.

The dilemma remains. By her plea, Merrigan acknowledges the inability of the inspection service to run itself as a business. Just as companies across the country spend billions on loss prevention, any private company that was doing inspections would start from the premise that, integral to management’s responsibilities, is the development of a system in which corruption is difficult and unlikely.

The hot area that AMS wants to develop is a database on every inspector, every lot and every company. By noting statistical anomalies, the AMS hopes it will be able to identify possible corruption. It is a fine idea as far as it goes, but the dynamics of inspection make it a less useful tool than one might expect.

A few buyers – exporters for example – may as a matter of course inspect every load. In the case of exporters, many need the certificate to protect themselves in the case of a claim against the steamship. But this is atypical. Inspections cost money, and there is no reason to inspect produce that is perfectly good quality. On a consigned load or a price-after-sale deal, the receiver may ask for an inspection even if the product is in grade to point out various defects that do not contribute to grade – such as stem mold on grapefruit. This is done to protect the receiver in case questions are raised later on as to the reason the receiver sold the product for an under market price.

But, typically, if a receiver is purchasing product outright, the only reason to call for an inspection is if the receiver expects that the product will be thrown out of grade. In this sense this whole database doesn’t really help. The fact that one wholesaler may get 100 percent of his inspected loads thrown out of grade and another may get only 50 percent thrown out of grade may mean nothing more than that one wholesaler is more accurate than another in his assessment of produce quality.

The use of this database to identify individual inspectors as giving too high a percentage of out-of-grade inspections would be completely unacceptable for the same reason that most people consider giving police officers a quota of speeding tickets completely unacceptable – it creates an incentive for an official to do something other than the right thing. After all, inspectors, like most human beings, would rather not be investigated by their bosses, so the incentive is to declare a marginal load “in grade” and keep one’s own statistics “in line”. But receivers and shippers are both entitled to inspectors unbiased by such thoughts.

In fact, receivers in general seem to be potential victims of a witch hunt. As Inspector General Viadero pleaded for help from shippers to identify suspected corrupt inspectors and receivers throughout the country, he failed as an officer of the U.S. government to provide receivers with any assurance that they will not be the subject of harassment by disgruntled shippers using the offices of the Inspector General as an instrument of revenge. The Inspector General would do the cause of justice a service if, even while calling for cooperation of all parties, he also made it clear that investigations will not be launched frivolously or merely based on the claim of one disgruntled shipper.

Many shippers are focused on collecting damages. On the specific loads identified by the government as having been influenced by payments, it seems very likely that damages will be won. But growers and shippers make a mistake in assuming that every load ever shipped would have been in-grade if not for corruption. That is highly unlikely.

Unfortunately, it is not clear that the companies against which these damages would be claimed actually have the money to pay these awards. This, combined with the fact that in many cases shippers are still relying on the same wholesalers to market their products, means settlements are possible.

Of course, shippers would love to sue the government for negligence in running such a corrupt inspection service. Alas, kings always take care of themselves, and so the doctrine of Sovereign Immunity precludes most lawsuits against the government.

Long term, however, the point remains that shippers use terminal markets, and particularly Hunts Point, because they need an outlet for volume. That corrupt practices cannot be counted on will mean that volume formerly bought by corrupt receivers at a fixed price because they knew they could throw items out of grade now won’t be bought without flexible terms such as consignment or price after sale.

This is where the conundrum on damages comes in: The shippers are entitled to damages because they sold at a fixed price and were fraudulently misled into taking a lower price. However, it is highly unlikely that the corrupt receivers made an extra profit by shorting the shipper. My estimate is that the profit margins of the corrupt receivers would turn out to be no different than the profit margins of the honest receivers. In this sense, what was stolen from the shippers was money they never would have earned had the inspection service been known to be scrupulously honest to begin with.  pb