On Feb. 18, Nestlé (NASDAQOTH:NSRGY) recalled approximately 238,000 cases of its Hot Pockets snacks after the USDA determined that meat from its supplier, Rancho Feeding, was "unfit for human food."
Rancho Feeding, a family- run plant located in Petaluma, Calif., is currently recalling 8.7 million pounds of meat that came from "processed diseased and unsound animals." The plant had already been under investigation since mid-January, after the USDA announced a recall of roughly 40,000 pounds of beef that was "produced without the benefit of full federal inspection."
The frightening fact is that Nestlé's Hot Pockets are only the tip of this meaty iceberg. Thousands of major retail chains, including Wal-Mart (NYSE:WMT) and Kroger (NYSE:KR), have also been affected by the Rancho Feeding recall.
In an interview with The Village Voice, Rancho Feeding founder Bill Niman speculated that the recall may stem from the plant's use of retired dairy cows, which are processed into low-grade meat after they stop lactating. Not all plants slaughter retired dairy cows for meat, since they are usually older and have health problems. One common disease is eye cancer -- in the past, farmers have been accused of whittling away the cancerous parts of the meat so the rest of the carcass can be salvaged.
Let's discuss three key business lessons highlighted by the Rancho Feeding debacle.
1. U.S. food recalls are surging
The number of food units recalled in the U.S. during the fourth quarter of 2013 rose 52% year-over-year to 10.6 million units, according to a recent report from Stericycle ExpertRecall. There were 19 recalls of meat, poultry, and processed egg products, for a total of 861,000 pounds of food. That's a disturbing increase from the first quarter of the year, when 450,000 pounds of food were recalled.
What caused the USDA to recall so much food?
According to Stericycle, 63% was recalled due to the typical reasons, which included E.coli, Salmonella, Listeria, and Staphylococcus contaminations, but an alarming 11% was recalled on account of not being inspected.
Therefore, it's no wonder that the USDA recalled Rancho Feeding's beef last month simply because it wasn't fully inspected. This clearly indicates that the USDA is struggling to keep up with the growth of the U.S. processed food industry.
2. Factory farming and animal health
That growth leads into the second problem -- the rise of factory farming in the United States. Factory farms started appearing in the 1970s, with millions of chickens, pigs, and cattle being kept in closely confined spaces to maximize protein production and sales.
Today, the U.S. gets 99.9% of its chickens, 95% of its pigs, and 78% of its cattle from factory farms. Through the use of hormones, factory farmers now have new ways to accelerate chicken growth, increase muscle tone in cattle, and boost milk production from dairy cows.
Let's take a look at how drastically factory farming has changed the poultry and livestock industries.
Chickens now only require 47 days to reach slaughter weight, compared to 70 days several decades ago, according to factoryfarming.com. Some chickens were grown so large that the price of their individual wings soared between 2012 and 2013. Newborn piglets can now grow from 2 pounds to 260 pounds in only six months. The average dairy cow now produces over 2,320 gallons of milk per year, compared to 665 gallons in 1950.
Pushing these animals past their natural limits has caused serious problems in the past. Last August, Merck (NYSE:MRK) halted sales of its livestock drug Zilmax -- which was intended to boost muscle growth in cattle -- after it caused them to become lame. Meanwhile, the closed quarters that factory farm animals are raised in have possibly caused the recent outbreaks of bird and swine flu across the world.
3. Is America that much safer than China?
Last September, the U.S. cleared the acquisition of Smithfield Foods, one of the world's largest pork producers, by Chinese company Shuanghui International Holdings.
Critics claimed that China's ongoing food safety issues -- which included pesticide-treated ham, melamine-tainted infant formula, reprocessed dead pigs, and melamine-tainted pet food -- demonstrated that Chinese companies were unfit for managing major multinational brands such as Smithfield.
While that argument may certainly hold weight, the USDA's own poor track record over the past year also shows that the U.S. has plenty of room for improvement. With factory farming on the rise in both countries, and larger companies like Nestlé failing to keep a close eye on their suppliers, regulators will have an increasingly tough time ensuring that processed food products are safe for human consumption.
The bottom line
Don't go tossing all your Hot Pockets in the trash and convert to veganism just yet -- so far, only Nestlé's Philly Steak and Cheese Hot Pockets (regular and croissant crust) and Wal-Mart's hamburger patties have been formally recalled.
However, consumers should keep up with the latest news regarding this recall, as it might eventually affect other products in their freezers as well.
Leo Sun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.